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Pricing Accumulating ETFs

Index tracking funds and ETFs
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Pricing Accumulating ETFs


Postby Chloe » March 12th, 2019, 8:24 am

I am thinking of using the iShares Core World ETF (SWDA) in a trading account to avoid income distributions. I understand that there will be Excess Reportable Income (notionally) paid 6 months after the fund's reporting year end (30 June). So I won't avoid paying income tax on the dividends; no problem with that.
However, does the market price take into account the dividends of the underlying equities during the reporting year on an ongoing basis and how does it do it?
For instance, to know the true value on a daily basis, does a market maker calculate dividends paid so far this year on the underlyings or maybe iShares publishes a daily NAV, including any cash?
Does the price become distorted around reporting year end - for instance by the market 'anticipating investors temporarily selling out of the fund to avoid being liable for income tax on the excess reportable income?
Is there any interesting or anomalous behaviour associated with accumulating ETFs?

TIA, Chloe

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Re: Pricing Accumulating ETFs


Postby tjh290633 » March 12th, 2019, 9:12 am

Accumulation units wind up the dividend income in the unit through the year, and when the fund goes XD, the nominal dividend becomes part of the capital. Consequently the price does not change at XD. Exactly the same procedure as income units, except that the price drops at XD and the cash is paid out.

So if each unit receives 1p of dividends on a particular day, the unit price rises by that penny, although market changes will also affect the price. Whereas normal unit funds calculate their price daily, ETFs are quoted continuously, and presumably the fund managers adjust the price continuously, to avoid premiums or discounts.


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Re: Pricing Accumulating ETFs


Postby hiriskpaul » March 12th, 2019, 10:58 am

I looked at this a couple of years ago and did not find any significant discount anomalies or increased trading volumes occurring near the end of the reporting period. You do sometimes see ETF discounts for brief periods, a few hours at most, during periods of market turmoil. iShares used to publish historical discount values, but I cannot find them now. There are certainly opportunities to book or avoid dividends around the end of a reporting period, but any such activity does not show up in the discount or trading volumes.

The goal of accumulating ETFs is to track the total return of the underlying index with minimal tracking error. They will reinvest dividends in a way that best fits with the goal. Despite the passive nature of ETFs, there will be active decisions being made by the dealing desk and that will include when to reinvest dividends. They will not be holding cash that gets released for reinvestment at the end of the reporting period.

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Re: Pricing Accumulating ETFs


Postby OhNoNotimAgain » March 12th, 2019, 2:13 pm

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