Usually a stock or an equity etf drops by the amount of the dividend on the ex dividend date. Does the same rule apply to a bond fund or bond etf?

When a bond etf pays the quarterly dividend because the underlying bond(s) pay out coupons, will the bond etf also drop by the amount of dividend?


No, they do not.

Stock funds and bonds funds collect income dividends in different ways. Stock funds collect dividends (as well as any capital gains that are realized) from the underlying stocks and incorporates these into the funds’ net asset value, or daily share price. That’s why a stock fund’s share price drops when the fund makes a distribution – the distribution comes out of the fund’s total net assets.

With bond funds, the internal accounting is different: Dividends accrue daily, and are then paid out to shareholders every month or quarter. Bond funds collect the income from the underlying bonds and keep it in a separate internal “bucket.” A bond fund calculates a daily accrual rate for the shares outstanding, and shareholders only earn income for the days they actually hold the fund. For example, if you buy a bond fund two days before the fund’s month-end distribution, you would only receive two days’ worth of income that month. On the other hand, if you sell a fund part-way through the month, you will still receive a partial distribution at the end of the month, pro-rated for the days you actually held the fund.


Also via bogleheads:

Most Vanguard bond funds accrue interest to the share holders daily. Here is a typical statement from a prospectus:

Each Fund distributes to shareholders virtually all of its net income (interest less expenses) as well as any net capital gains realized from the sale of its holdings. The Fund’s income dividends accrue daily and are distributed monthly. The term accrue used in this sense means that the income dividends are credited to your account each day, just like interest in a savings account that accrues daily. Since the money set aside for your dividends is both an asset of the fund and a liability, it does not affect the calculated net asset value. When the fund distributes the income dividends at the end of the month, the net asset value does not change as both the assets and liabilities decrease by exactly the same amount. [Note that if you sell all of your bond fund shares in the middle of the month, you will receive as proceeds the value of your shares (calculated as number of shares times net asset value) plus a separate distribution of the accrued income dividends.]

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    Thank you very much! But by this explanation, it seems that there is no cut off date (ex dividend date) for a bond fund. But in reality, there is. How to explain that? – Victor123 Apr 28 '15 at 15:36
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    @Victor123 Ex-dividend date on a bond fund is basically an interest payment date. The payments are every month. You are paid a prorated amount based on when you invested. So say there was $1 of interest per share in a month. If you bought 1 share in the middle of the month then you would only get $0.50. If you had purchased it previously and held it for the entire month then you would get the full $1. If you bought it the day before then you would only get about 1/30th of $1. The Fund’s income dividends accrue daily and are distributed monthly. – basher Apr 28 '15 at 16:07

It may be true for a bond fund. But it is not true for bond etf. Bond etf will drop by the same amount when it distribute dividend on ex-dividend date.


Most bond ETFs have switched to monthly dividends paid on the first of each month, in an attempt to standardize across the market.

For ETFs (but perhaps not bond mutual funds, as suggested in the above answer) interest does accrue in the NAV, so the price of the fund does drop on ex-date by an amount equal to the dividend paid.

A great example of this dynamic can be seen in FLOT, a bond ETF holding floating rate corporate bonds. As you can see in this screenshot, the NAV has followed a sharp up and down pattern, almost like the teeth of a saw. This is explained by interest accruing in the NAV over the course of each month, until it is paid out in a dividend, dropping the NAV sharply in one day.

The effect has been particularly pronounced recently because the floating coupon payments have increased significantly (benchmark interest rates are higher) and mark-to-market changes in credit spreads of the constituent bonds have been very muted.

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