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(This is a follow up to my expense ratio question, here).

Today I am attempting to study and compare the various Large Cap ETFs but realize I don't know how to even do the comparison, namely in regards to expense ratios and dividends.

For example, take the IVW - iShares S&P 500 Growth ETF and the RPG - S&P 500 Pure Growth ETF. Both of these ETFs track the S&P 500/Citigroup Growth Index.

The 5 year return of IVW is 125.43%, with an expense ratio of 0.18%, an Annual Dividend Rate of $1.47, and an Annual Dividend Yielf of 1.38%.

The 5 year return of RPG is 183.31%, with an expense ratio of 0.35%, an Annual Dividend Rate of $0.53, and an Annual Dividend Yield of 0.67%.

First question: when I see the "5 year return" of an ETF or mutual fund, I am assuming this is the return not accounting for the expense ratio and dividend; is this correct? Otherwise, this question is mute.

Now let's assume I have calculated the return less the expense ratio.

Let's say I put in $100 to both of these funds 5 years ago. Not accounting for the expense ratio, today, that $100 would have grown to $225.43 and $283.31 for IVW and RPG, respectively.

My question is essentially: when and on what basis do calculate the dividend bonus? Do I multiply the annual dividend yield to the market value of my shares in the ETF at the end of the year, and add that to my market value?

Do dividends not actually get paid every year on the spot like annual expense ratios do? Can the dividend ratio change? If so, does it usually change, especially to the point that doing these calculations are worthless because they can't be predicted for the long term investor?

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The "5 year return" is the whole answer. It already accounts for the expense ratio and for reinvesting dividends. It is quoted as "total return" for different time periods.

You can also see the difference between funds (with expenses already subtracted out and dividends already added back in) in the widely available graphs that show the growth of $10,000 invested in the fund.

Dividends are usually more stable than fund prices but dividends do vary from year to year. They can only be estimated based on typical years.

  • Interesting- I figured expense ratios would be more stable. Good to know! – Matthew Moisen Jul 26 '14 at 23:49
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    @MatthewMoisen: He's saying the dividends are more stable than the market value of shares in the fund, not more stable than the expense ratio. – BrenBarn Jul 27 '14 at 1:21
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Regarding:

Do dividends not actually get paid every year on the spot like annual expense ratios do? Can the dividend ratio change? If so, does it usually change, especially to the point that doing these calculations are worthless because they can't be predicted for the long term investor?

Future dividends for a ETF or Mutual Fund are impossible to predict.

Even if the fund manager decides that they are going to follow an index, they don't control the makeup of the index. If two companies in the S&P 500 merge, then the index will change. If there is a bubble or a crash the makeup of the index will change.

The stocks that makeup the fund have independent board of directors that have to decide to raise or lower their dividends. Here is a list of S&P 500 Companies that have raised their dividend every year for 25 years in a row; There are about 50 of them.

Of course even the list of stocks paying dividends isn't stable. Apple paid a dividend in the late 80's and early 90's but then didn't until after Jobs died. Each year companies have to decide if tarting or stopping a dividend makes sense.

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