DIVIDEND DRAG

Today's word: DIVIDEND DRAG
Theme for this fortnight: DIVIDENDS

A disadvantage of the dividend structure of unit trust exchange-traded funds (ETFs) that results from SEC rules that stipulate that passively managed ETFs cannot reinvest dividends back into the portfolio. ETFs must instead accumulate the dividends in cash and pay them to holders at periodic intervals. During periods of rising markets, the dividends would be better served being reinvested in securities rather than held in cash. This leads the ETF to lag a portfolio that would be able to reinvest.