PFF Panel 3
Seedly PFF 2019
Asked by Anonymous
Asked on 02 Mar 2019
Nicholes Wong: But if the dividends are 4% every year, where does the 4% go? Wouldn't that be a huge loss compared to buying the stock itself (esp when compounded over many years)?
Well they get affected by tracking errors and ETFs management fees. Hence, you might see your ETFs giving slightly lower returns than the index itself. Just make sure the ETFs you chose have good tracking error and low management fees. It also takes time for them to rebalance the allocation.
All the answers provided are key reasons that contribute to the lower performance of Index ETF to the Index it’s tracking.
Another reason is because the measurement of performance of Index ETF and Index is by time-weighted return. This form of measurement does not take into account the effect of reinvestment of dividends. Thus, when coupled with the effects of fees etc, Index etf underperform.
However, in reality, you maybe performing better than Index because you are holding more units of the Index etf and this compounds your returns over time.
For example: (exclude fee)
index started at $1
Index returns 10% + 2% dividend
index ends at $1.10
Index ETF started at $1 - you invest $100, 100 units
Index ETF returns 10% + 2% dividend
index etf price $1.10
your holdings = $112.20 $1.10 at 102.2 units.
You will notice that both Index and Index etf will have annual return of 10% which is the figure that they will report. However notice that as an individual, you’re better off with the extra 2.2 units and your return is actually 12.2%. This is just a simple illustration and in reality it is not so clear cut with all the fees involved.
Therefore, when investing always track your own investment using money weighted return (XIRR) and not rely on the fundhouses return.
on 05 Mar 2019
Is this a trick question??!! The index itself is either a Net Return Index(dividends paid out) or Total Return Index(dividends reinvested). So your ETF will track the relevant index...and there will be a tracking error associated with it. All this information is mentioned in the fact sheet of the etf.
A very good comparison here is VWRD and IWDA. Both are world index ETF.
VWRD distributes back the dividends while IWDA automatically reinvests the dividends.
If you bought both, you will notice IWDA has more capital gains that IWDA.
But why does the ETF not beat the market?
Well, thats because ETFs also has fees involved. Although the fees are much lower than unit trusts, it does still affect the performance. However, an ETF that does reinvesting will track more closely than an ETF that distributes dividends because of compounding.
I don't think you can find a market beating ETF.
Updated on 05 Mar 2019
It depends on each ETF's policy. Alot ETFs pays out dividend as well, but on a fixed schedule. For STI etf like the spdr and NikkoAM sti etf, they pay out dividend semi annually. Some might have DRIP dividend reinvestment program, which the dividends is used to purchase more units of the ETF instead.
Most index u see are price-level index. There are also total return index version of each index that assumes reinvestment of dividend.