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Can a Mutual Fund withhold divindends (or portions of) that are earned by underlying investments?

If there are two Mutual Funds that track the same index and that index has dividend earning stocks, should those dividends that are earned by the two MFs be identical? Or can the funds actually pay out different dividends? I inquire as I'm interested in what else I should compare other then fees as I compare funds (and ETFs) that track the same index (i.e. the S&P 500)

Feb 08, 2012 by Tim from Manhattan, NY in  |  Flag
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Tim, we use software that can show historical data for just about any investment including ETF's that are "index" ETF's and imply they track an index. We had done quite a bit of research on this lately as we had a client that wanted us to build a portfolio of ETF's that exactly matched the outcome of the indexes. While it is relatively easy to find what I would define as true surrogates (+/- 0.02% annual return and standard deviation) for a few of the more popular categories such as the S&P 500, there were quite a few asset categories that the closest we could come on a 10 year history was perhaps +/- 0.50% annual difference – far from a surrogate. If you are looking to seek a return comparable to a particular index, I recommend you seek an advisor that has the tools to do that analysis for you and find the closest match. If you contact me, and indicate what index you are trying to imitate, I’d be glad to supply a free analysis for you. Thanks for your question. )

Comment   |  Flag   |  Feb 09, 2012 from East Dundee, IL

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Tim - I believe I am correct in saying that if two mutual funds own identical portfolios, have identical trading during the year, and charge identical fees and expenses, then the fund's distributions will be about the same. I say "about" rather than "exactly" because while funds are required to make distributions at least once a year, some funds choose to make distributions more frequently. Your second statement, that you are "interested in what else I should compare other then fees as I compare funds (and ETFs) that track the same index (i.e. the S&P 500)" begs for a longer response. First, not all funds "that track the same index" are necessarily pure index funds; some may be passively managed to track an index roughly, not exactly. I have even heard some active managers claim to track (and try to outperform) an index. Other funds may specifically allow for some degree of tracking error. Almost every fund will have some variance compared to the index, simply because of inflows and outflows, index reconstitutions, and other technical factors. For broader indices, like the Russell 3000, funds sometimes invest in a basket of securities that is designed to track the index, even though it may not include all of the index constituents. My point is that you will see tracking error among and between funds. Second, expenses show up in performance but are usually difficult to track back through the fund's public disclosure documents. Assuming low turnover across all of the funds you are considering, expenses should be comparable. But some passive investment strategies are also "tax managed" which means that managers will trade off tracking error in return for tax efficiency. If you are investing in a taxable account, these funds may be worth considering. Third, ETFs and mutual funds are apples and oranges in one sense: you can generally buy and sell mutual funds at net asset value (NAV) once a day, at the close of business. ETFs are continuously traded in the market, and may trade at a discount or premium to NAV. And as you might expect, retail investors are often buying at a premium and selling at a discount. You should factor in transactions costs when evaluating ETFs compared to mutual funds. Finally, while index funds are simple and intuitive, make sure that the index your fund is tracking is worth investing in. You should not invest in a cost-effective fund that tracks a poorly-designed index. In the U.S. market this is not a major problem, since there are a number of broad market indices that segment the market nicely by style and risk type. But in international markets and especially in emerging markets, many of the local market indices are not well-diversified or are otherwise poorly-engineered. You may want to consider expanding your search to include passive funds that are not slaves to an index, but still offer broad diversification, low costs, and tax efficiency. Best of luck.

Comment   |  Flag   |  Feb 08, 2012 from San Francisco, CA

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Steve Casull Level 13

Tim, No. The dividend stream will not be identical. Frankly, if two different mutual funds ever returned the same dividends it would be weird. Supernatural weird. It would require both managers of the two funds to have purchased exactly the same amount of each companies stock at the same time always, and also sell the same amount of the same companies stocks at the same time. All this among 500 different company stocks. Let me be blunt. There is a reason why the SMALL PRINT below every mutual fund brochure says "past performance is not indicative of future performance". If you are comparing returns of mutual funds, you are looking at "past performance". Period. Do not get caught up in the math. Find a LOW FEE advisor that also specializes in showing you how to save you money on your personal life quest. Are you selling a home, for example. Don't use a real estate agent. Let the buyer's agent become your ally, thus saving ONE OF THE COMMISSIONS typically involved. This also allows you to whittle the price down the potential 3% you are saving. Now tell me, how many advisors have told you that? It's time for Advisors to become Advisors not salespeople

Comment   |  Flag   |  Feb 09, 2015 from South Jordan, UT

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Dividends from the companies held by a stock index fund can either be used by the fund to pay their expenses or paid out and it varies by fund.

Also, an index fund rarely owns every stock in the index. Since most indexes use weight each company's share of the index by the total vaue of shares outstanding (market capitalization), most funds only own the larger companies in the index and still track the index closely.

The two main things you want to look at in an index fund are fees and 3-5 year performance vs. the index and similar index funds. If you're really analytical there are other things too, but for most people, those two will suffice. The Vanguard funds are very hard to beat in that regard.

Comment   |  Flag   |  Apr 09, 2015 from Charlotte, NC

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