Two identical ETFs. Two different returns. Huh?

Two identical ETFs. Two different returns. Huh?

I am trying to pick an exchange-traded fund that tracks the Canadian market and I’m confused by something. The iShares Core S&P/TSX Capped Composite Index ETF (XIC) and the BMO S&P/TSX Capped Composite Index ETF (ZCN) hold exactly the same stocks and have the same management expense ratio of 0.06 per cent. But when I checked their closing prices on Thursday XIC was down 0.31 per cent but ZCN was up 0.33 per cent. That’s a big difference. Is ZCN just a better ETF?

Not at all. I was initially scratching my head over this as well, until I noticed that XIC and ZCN have slightly different dividend payment schedules. Both funds declare dividends quarterly, but XIC’s next payment lands on June 30, with an ex-dividend date of June 24, whereas ZCN’s dividend will be paid on July 6, with an ex-dividend date of June 28.

Because XIC’s ex-dividend date was on Thursday – meaning buyers on or after that date would not receive the dividend – the value of the dividend was effectively stripped out of XIC’s market price when trading opened that day. ZCN’s dividend, on the other hand, was still reflected in its market price on Thursday. That explains why the prices diverged.

But the difference is temporary. When ZCN goes ex-dividend on Monday, I expect that the situation will be reversed and XIC will outperform ZCN that day.

Over longer periods, however, their returns are virtually identical. For the 10 years through May 31, XIC and ZCN posted annualized total returns (including dividends) of 6.73 per cent and 6.71 per cent, respectively, compared with an annualized total return of 6.81 per cent for the S&P/TSX Composite Index.

Bottom line: Both ETFs provide an excellent, low-cost way to get broad exposure to Canadian stocks.

Nvidia Corp. (NVDA) declared a four-for-one stock split on May 21, with a record date of June 21 and an effective split date of July 19. What happens if I sell my 10 shares on, say, July 5 – after the record date but before the split date? Would I get a “free lunch” of 30 shares when the split happens on July 19?

No. If that were the case, everyone would be doing it.

The source of confusion here is the record date. With dividends, the record date matters because only shareholders “of record” on this date are entitled to the next dividend. But because trades take two days to “settle” – that is, for the cash and shares to actually change hands – you must buy a stock two business days before the record date to be entitled to receive the dividend. If you wait until the day before the record date, you’ll be too late. That’s why this date is called the ex-dividend date.

With stock splits, however, the record date is essentially meaningless except for the company’s record-keeping purposes.

In your case, if you held 10 NVDA shares on the record date but sell them before the split occurs, you will also transfer your right to receive 30 additional shares in the July 19 split. Technically speaking, the shares you sell would have a “due bill” attached, meaning the new owner – not you – is “due” the additional shares.

If I buy a stock a few days before the record date, and sell it a few days after the record date, can I still receive the dividend? This sounds like an easy way to make money.

Sorry, but this is just another example of an illusory “free lunch.” In this case, you will get the dividend, but the stock will have started trading ex-dividend the day before the record date. When you sell, the value of the dividend will no longer be reflected in market price. So, what you gain by receiving the dividend you will lose (all else being equal) because of a lower share price. It rarely works out exactly that way – stock prices are affected by myriad other factors – but the take-home message here is that, if something seems too good to be true, it usually is.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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Published at Fri, 25 Jun 2021 19:53:44 +0000