Here’s a look at what makes up an ETF distribution

Article Excerpt

The dividends paid by public corporations are normally a portion of net income or cash flow. This formula is followed by dividend-paying ETFs, but they also distribute trading profits and sometimes return investors’ capital as part of their unitholder distributions. As an example, an ETF that invests in dividend-paying companies will receive dividend income from the stocks it holds. There may also be other sources of income such as interest earned on cash holdings and fee income from stock lending. Profits and losses that are generated from trading in the underlying portfolio (that is capital gains) are also considered income. Against the income of an ETF, the fund expenses are subtracted. Typical expenses include the fees for managing the ETF and similar amounts paid to auditors, custodians and stock exchanges. The net income, excluding trading profits, can be considered sustainable cash flow to support the ETF’s distributions. In summary, distributions made by ETFs are typically a combination of dividends and other income received…