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More ETFs Now Paying Monthly

June 28, 2010

Both iShares and Claymore have announced that several of the their ETFs will start paying distributions monthly instead of quarterly. The announcements came within five days of each other earlier this month. It’s good to see the two biggest players in the ETF market pushing each other into improving their products.

Here are the ETFs that will begin paying monthly distributions starting in July:

Claymore Equal Weight Banc & Lifeco (CEW)
Claymore 1-5 Yr Laddered Government Bond (CLF)
Claymore 1-5 Yr Laddered Corporate Bond (CBO)
Claymore Advantaged Canadian Bond (CAB)
Claymore S&P/TSX CDN Preferred Share (CPD)
Claymore Balanced Income CorePortfolio (CBD)
Claymore Balanced Growth CorePortfolio (CBN)

iShares DEX All Corporate Bond (XCB)
iShares DEX Short Term Bond (XSB)
iShares DEX Universe Bond (XBB)
iShares DEX All Government Bond (XGB)
iShares DEX Long Term Bond (XLB)
iShares U.S. IG Corporate Bond (CAD-Hedged) (XIG)
iShares U.S. High Yield Bond (CAD-Hedged) (XHY)
iShares Dow Jones Canada Select Dividend (XDV)
iShares S&P/TSX Capped REIT (XRE)
iShares S&P/TSX Capped Financials (XFN)
iShares S&P/TSX Income Trust (XTR)

The press releases from both Claymore and iShares say they made this change because investment income is becoming more important to Canadians. It’s true that the new monthly schedule will improve cash flow for people who are drawing down their nest egg.

However, the new schedule may be a disadvantage for small investors who are trying to grow their portfolios with dividend reinvestment plans, DRIPs. (Many discount brokers offer this service with Canadian ETFs.) Because only full shares can be purchased with a DRIP, small investors may find that monthly distributions are smaller than the cost of a single share.

For example, suppose an ETF trading at $30 currently pays a quarterly distribution of about 1%. That would mean you’d need 100 shares in the fund — about $3,000 — to receive enough to purchase a single share with a DRIP. When the fund switches to a monthly distributions, each payout will fall to 0.33%. That means investors will need to hold about $9,000 in the fund to receive a distribution large enough to buy one share. Anyone holding less than that will receive all of their distributions in cash.

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3 comments

  1. I have exactly the concern you mention regarding DRIPs. I’m anxious to see how the first payment plays out.


  2. Just a suggestion, put the distributions into one of the big bank monthly income funds while you are waiting to build up enough to buy more ETF shares. You can invest as little as $25.00 and after 90 days you can remove money without penalty. Kind of a holding center for your distributions till your ready.


  3. How do ETF companies achieve this effect? Given that most underlying securities still have dividend payouts quarterly, it sounds like ETFs would have to take a single payout and split it into 3 payments instead (1 immediate and 2 more for the consecutive months).

    E.g., underlying companies distribute $900 worth of dividends on Dec 31 to the ETF; the ETF splits it into 3 parts and distributes $300 on Dec 31, Jan 31, and Feb 28.

    If that’s the case, there’s then another disadvantage besides the DRIP issue – there’s now an opportunity cost of being able to receive and immediately reinvest the full quarterly amount. Instead, investor has only 1/3 to reinvest right away, technically losing interest on the other 2/3 for a while.

    The issue is perhaps exacerbated in case of bond ETF (such as CLF noted above), since bonds have coupon payouts on semi-annual basis. This implies that now the opportunity cost (in the first month after coupon payment) is 5/6 of otherwise expected income.

    It’d be interesting to know whether this is the case.



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