More ETFs Now Paying Monthly

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, or 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.

9 Responses to More ETFs Now Paying Monthly

  1. Michael Davie June 28, 2010 at 10:24 pm #

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

  2. Paul June 29, 2010 at 11:38 pm #

    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. Tony June 30, 2010 at 11:01 pm #

    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.

  4. Sean July 9, 2010 at 12:47 pm #

    For me there is another problem. I have a bond etf in my RRSP and I make my max contributions for the year in January. There will be a little bit of uninvested funds every month (8 more times now) and brokerage does not pay interest. If I were to withdraw it, there is a fee plus the paperwork.

  5. Canadian Couch Potato July 9, 2010 at 10:46 pm #

    @Sean: Does your broker allow DRIPs? If so, the amount of cash kicked into your account shouldn’t be more than $20 or $30 a month, since any more than that would be reinvested in a full share. So the cash drag in your account should be really small: one month’s interest on $30 at 2% per annum is 5 cents.

  6. NorthernRaven August 9, 2010 at 8:12 pm #

    Of course, there is more than one fund in a portfolio. Using the back of a virtual envelope and the Global Couch Potato iShares portfolio, it might work out like this if your broker is doing their own DRIP for you with full shares. Assume that the average remainder after each distribution is half the share price. Taking the current price and yearly cash distributions listed on the iShares site, with monthly distributions for XBB, quarterly for XIC and semi-annual for XIN and XSP, one can sum up the remainder cash for each period, and assume 2% annual lost interest if it just sits in a no-interest brokerage account. It comes out to a little over $2 for the year – we’s being robbed, I tell ya… :)

    BTW, is it true that the Claymore funds now have their own internal DRIP program, which would allow fractional shares? Or would this depend on whether each broker supported it?

  7. Canadian Couch Potato August 9, 2010 at 8:35 pm #

    @Raven: You’re right that the cash drag caused by the remainder is small. It’s trivial if the investor gets four or five new shares a month, plus a few bucks left over. But the point is that in a small portfolio, it’s possible that no distributions are ever reinvested.

    Regarding Claymore’s DRIP program, no, it does not allow fractional shares:
    http://www.claymoreinvestments.ca/en/investment-options/exchange-traded-funds/etf-drip/drip

  8. NorthernRaven August 10, 2010 at 12:49 am #

    Wouldn’t a small portfolio be better off in the e-Series (where you could get full reinvestment) rather than ETF’s anyway, due to the commission costs outweighing the MER difference? It looks like you would need around $10K in XBB right now to have the monthly distribution kick over the share price? Of course, even those with large amounts still run into a similar problem with the remainder fraction. Perhaps iShares could do a split on things like XBB with high share prices and frequent distributions… :)

    I assume the worry about distributions never being reinvested is that potato-investor won’t add the money in with their next re-balancing purchases?

  9. Jay September 17, 2010 at 3:26 pm #

    This is certainly an annoying change for a small investor like myself. I bought some shares of Claymore Gov. Bond (CLF) earlier this year. At the time I specifically calculated the number of shares to produce adequate distributions to have enough to reinvest a single share (e.g. 105 shares X $0.24 dist = $25 > ~$20/share). Now, as you and commenters have illustrated, I end up with ~$8/month just sitting in my cash balance.

    While it is small dollar amounts, the idea was to compound the returns into shares rather than just sitting there. Without a sufficient amount to use the DRIP and the prohibitive cost to buy shares directly, the strategy is busted (until I have enough to increase my position).

    For what it’s worth, my RBC Global Corporate Bond fund does automatically reinvest its distribution, because of the fractional units and no transaction costs. Perhaps another reason to recommend that investors with smaller amounts stick with low-cost funds initially.

    Great blog.

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