Most managed investments including Exchange Traded Funds (ETFs) are offered by way of units in a unit trust. Units are to a unit trust what shares are to a company; they are the bits that fractionalise ownership.
Unit prices often fall on the 1st of July when distributions are paid. Why does this happen? The answer is quite logical; throughout the year the investment is collecting the income (interest, dividends, rent etc) from underlying investments. Each 30 June, the unit trust must distribute all the collected income to investors. When the investment pays out the distribution , the value of the assets in the unit trust is reduced by the amount of the total payout. In other words, the amount paid out in cash distribution no longer forms part of the managed investment (it still belongs to the unit holder and is in their bank account, instead of in the investment) and so the value of the unit price declines.
Take the following example:
Better Invest Global Share Trust (BIG) has a current unit price of $1.00. It announces that it will pay a distribution of $0.04 per unit to unitholders as of 30 June 2023. This means anyone invested in BIG as at 30 June will receive a cash payment of 4c per unit owned.
Ignoring all price fluctuations in the underlying investments, investors can expect the unit price of BIG to fall to $0.96 on 1 July 2023 to reflect the fact that $0.04 per unit has been paid to unitholders .
After the payment, investors still have $1.00 in assets, it is just that $0.04 of it is now in the investors bank account and $0.96 remains in the managed investment.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.