Do ETF dividends make up for fees?

Question

Do ETF dividends generally make up for the fees of the ETF?

For example, lets use QQQ.

Answer 1

Any ETF has expenses, including fees, and those are taken out of the assets of the fund as spelled out in the prospectus. Typically a fund has dividend income from its holdings, and it deducts the expenses from the that income, and only the net dividend is passed through to the ETF holder.

In the case of QQQ, it certainly will have dividend income as it approximates a large stock index. The prospectus shows that it will adjust daily the reported Net Asset Value (NAV) to reflect accrued expenses, and the cash to pay them will come from the dividend cash. (If the dividend does not cover the expenses, the NAV will decline away from the modeled index.)

Note that the NAV is not the ETF price found on the exchange, but is the underlying value. The price tends to track the NAV fairly closely, both because investors don't want to overpay for an ETF or get less than it is worth, and also because large institutions may buy or redeem a large block of shares (to profit) when the price is out of line. This will bring the price closer to that of the underlying asset (e.g. the NASDAQ 100 for QQQ) which is reflected by the NAV.

Answer 2

It depends.

Dividends and fees are usually unrelated. If the ETF holds a lot of stocks which pay significant dividends (e.g. an S&P500 index fund) these will probably cover the cost of the fees pretty readily. If the ETF holds a lot of stocks which do not pay significant dividends (e.g. growth stocks) there may not be any dividends - though hopefully there will be capital appreciation.

Some ETFs don't contain stocks at all, but rather some other instruments (e.g. commodity-trust ETFs which hold precious metals like gold and silver, or daily-leveraged ETFs which hold options). In those cases there will never be any dividends. And depending on the performance of the market, the capital appreciation may or may not cover the expenses of the fund, either.

If you look up QQQ's financials, you'll find it most recently paid out a dividend at an annualized rate of 0.71%. Its expense ratio is 0.20%. So the dividends more than cover its expense ratio.

You could also ask "why would I care?" because unless you're doing some pretty-darned-specific tax-related modeling, it doesn't matter much whether the ETF covers its expense ratio via dividends or whether it comes out of capital gains. You should probably be more concerned with overall returns (for QQQ in the most recent year, 8.50% - which easily eclipses the dividends.)