Hi guys,
So I went down a little rabbit hole in terms of ETF distributions to see what truly lies behind the red curtain of these gizmos. I made a couple findings that I found to be quite striking and had a few questions about them, and would love to know your thoughts.
- What’s the true essence of ROC, are there limits to it, and if so what are they?
Take for instance these two funds, ZDV and ZDI.
https://www.bmogam.com/ca-en/advisors/zdv-bmo-canadian-dividend-etf/
https://www.bmogam.com/ca-en/advisors/zdi-bmo-international-dividend-etf/
One is a Canadian dividend fund and the other is an international dividend fund, same product maker though which is BMO.
If you look at distribution history for both, ZDV - Canadian one - has been flat in terms of distributions (since 2020).
On the other hand, ZDI has seen big cuts in terms of total distributions in the same time frame.
In the case of ZDV, distribution from dividends were cut, either due to the funds re-balancing or underlying securities cut or a combo of both.
However the total distribution was left unaffected due to ROC masking the cut in dividends.
On the other hand, distribution from dividends actually increased for the other fund, although total distributions actually decreased! This was because the fund cut ROC.
This left me confused and hence raises the question, why? The entire point of ROC if understood is to have some stability in monthly distributions. Instead of weird numbers like 5234 one month and 6,700 next and 6k next month after that, ROC comes in as a buffer of sorts to smoothen out distributions. So why in the world would they decide to cut it?
This leads me to believe that there’s limits to ROC and how much can be used. If true, I’m curious to know - in seeking to assess funds in the future - what that limit is…
- How does a fund asses capital gains distributions?
This is in regard to covered call ETFs, premiums are considered to be capital gains. Yet, take a fund like ZWC, and strangely enough there’s zero distributions coming from capital gains!
https://www.bmogam.com/ca-en/advisors/zwc-bmo-canadian-high-dividend-covered-call-etf/
Surely it’s not because they didn’t sell any calls, that defeats the purpose of the fund. So why are there no capital gains?
The only other source of distribution here - other than dividends - is ROC.
This leads me to believe that ROC is not only “your cash coming back to you”. It has more powers than we give it credit for.
My theory is that for whatever reason, the fund has decided that the capital gains for whatever reason have become ROC. Is this possible? If so, why would they do this? Also, wouldn’t this break the idea that ROC is just your money back to you? It can also be capital gains too - hidden capital gains in a way.
- Dividend cuts from covered calls do not make sense?
Compare ZDV the Canadian dividend fund linked above, and ZWC it’s covered call counterpart:
https://www.bmogam.com/ca-en/advisors/zwc-bmo-canadian-high-dividend-covered-call-etf/
From 2020 to 2021, distributions specifically from dividends for both funds got cut by around 20%.
I don’t get how this is possible. When you buy a covered call ETF, you have the added risk of getting called away for your securities meaning your distributions from dividends would get cut. This is in addition to the risks of cutting from things like re-adjusting the portfolio, or underlying securities cutting dividends, or both.
Wouldn’t this mean then that both of the covered call ETF would have much more of a cut than the other one all else being equal?
You might say who cares? Well this all leads to my theory about ROC. This is the only other variable that seems to explain all of these strange things happening to distributions. Either that or I’m just completely missing something…
In any event, would love to know what you guys think about all of this!
Thanks in advance.
Edit: I’m not looking to discuss the dividend irrelevancy theory, don’t bother.
Edit 2: for anyone thinking why this matters, I think the answers to these questions are important tools for any investor looking for which dividend ETF to invest in.
Submitted June 10, 2022 at 02:07AM by JusticeForSimpleRick https://ift.tt/CrFwhJQ
