Gimme an S&P 500 ETF, Hold the Dividends

A new ETF is putting the “end” in “dividend.”

The Roundhill S&P 500 No Dividend Target ETF, which began trading earlier this month, accomplishes that by moving its holdings from one underlying index exchange-traded fund to another, just ahead of dividend payments, intending to avoid them altogether. It’s a strategy for investors who don’t want the tax consequences of dividends paid out by S&P 500 stocks. 

“Prior to and since XDIV’s launch, we’ve received a significant number of inquiries from a wide range of ETF investors, including direct retail, financial intermediaries and institutional investors,” said Dave Mazza, CEO of Roundhill Investments. “Over the longer term, we believe that institutional investors, particularly non-US investors, will find the greatest value in the benefits of this innovation.”

Axing the Taxing

ETFs, already valued for their tax benefits, have seen a few developments recently that extend such perks. For the very wealthy, several companies have rolled out products that take advantage of 351 exchanges, where assets in stocks with years of built-up capital gains can be transferred to ETFs on a tax-deferred basis. The Roundhill fund is different, though, with a focus on minimizing taxable income by sidestepping dividends.

Having such a strategy in the already tax-efficient wrapper of an ETF makes sense, said Chris Chen, owner of Insight Financial Strategists. “Stocks will tend to go down on the ex-dividend date. Therefore it may make sense to sell it before it goes ex-dividend and buy it back right afterwards, after it has gone down,” he said.

A few details about the Roundhill S&P 500 No Dividend Target ETF:

• It is designed to rotate among different S&P 500 ETFs, including the iShares Core S&P 500 ETF (IVV), SPDR S&P 500 ETF Trust (SPY) and Vanguard S&P 500 ETF (VOO). Currently, 99.99% of its assets are in the SPDR Portfolio S&P 500 ETF (SPLG), though it may invest in more than one ETF at a time.
• It’s actively managed, with gross fees at 21.5 basis points, though waivers bring the net expenses down to 8.49 bps.

Friends with Dividends: Recent research sponsored by Vanguard found benefits to investing in dividend-paying stocks. Researchers found that 74% of the time, dividend-stock owners reinvest their dividends rather than pocketing the money. Further, such investors tend to stick with dividend-paying stocks because they see the companies as being fiscally responsible. 

“Equity income investors enjoy the utilitarian benefits of returns on their funds, but also the expressive and emotional benefits that accompany perceiving the companies whose stocks they hold as more trustworthy and caring,” the authors wrote.