Through what’s known as a “distribution trade,” investors in dividend-paying ETFs can potentially work with Authorised Participants to realise a cost saving.
For SPDR ETFs that pay dividends (i.e. distributing ETFs), the ETF needs cash in order to pay a dividend to its shareholders. Typically, the ETF will be required to sell some of the underlying securities in the portfolio to raise this cash; however, this process involves portfolio turnover and therefore incurs trading costs for the existing ETF shareholders.
Instead, via a distribution trade, SPDR ETFs may offer its Authorised Participants (APs) the opportunity to create new shares of the ETF via its primary market cash dealing model, and waive the usual primary market fees. Subsequently, the cash raised can be utilised to fulfil the dividend distribution.
As APs have not been charged the primary market creation fees, they are able to pass on potential price improvements back to end investors.
This exercise is particularly beneficial for ETFs, where the underlying holdings include securities that can face large stamp or financial taxes (such as UK, European or emerging market equities) or securities that are more expensive to trade (emerging market debt or high yield bonds).
First of all, investors need to be aware of when upcoming ETF dividend distributions are taking place. Our dividend distribution calendar can be found here.
Once an investor has identified an ETF with an upcoming distribution that they would be interested in buying, they then need to determine whether any of their approved counterparties are APs that can facilitate the distribution trade for them. To do this, investors can either consult the list of APs here or they can contact the SPDR Capital Markets team. Details on how to do that can be found here.
After such a consultation has taken place, investors can then explore the opportunity with the AP to determine whether they are able to access a distribution trade. The AP will then liaise with the ETF issuer and attempt to receive an allocation of the trade, which they can then sell on to the end investor.
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