ETF is a passively managed fund, that is, a passively managed fund. This means that ETF's investment strategy basically follows an index (such as S&P index, Nasdaq index, Dow Jones index, etc.). ) to invest. Therefore, the construction of ETF portfolio does not need too much research and analysis and artificial subjective judgment, but invests by copying the index. This passive management means that ETF can basically achieve low cost, higher transparency and liquidity. In contrast, actively managed funds need investment decisions of investment managers and personalized portfolio construction, so the cost is higher. It is the low-cost and passive characteristics of ETF that make investors more willing to choose it.
Why does ETF choose passive management investment strategy? This is closely related to the trading mode of ETF. The trading mode of ETF determines that investors can buy and sell at any time, and it is very convenient for funds to enter and exit. So the trading volume of ETF is huge. Accordingly, ETF's assets are huge, and the cost of maintaining the whole portfolio is also high. If ETF chooses the investment strategy of active management, the management cost of the whole portfolio will be extremely high, which may lead to the high management cost of ETF, unable to keep up with the rise and fall of the index, and ultimately affect the performance of ETF, allowing investors to choose other investment tools. Therefore, it is safer for ETF to choose passive management investment strategy.
So, why do ETFs rarely pay dividends? This problem is also related to the investment strategy of ETF. ETF's investment strategy is to copy an index, so ETF has no alpha value (that is, excess return). On the contrary, ETF can only track the fluctuation of one index. Compared with actively managed funds, ETFs can't get more opportunities to explore value in the process of portfolio construction, and they can't get more income by issuing new shares, so ETFs mostly adopt the method of temporarily not paying dividends. On the contrary, ETFs generally choose reinvestment, and reinvest dividend income in ETF portfolio to enhance the investment ability of tracking index. This can increase the net value, reduce the management cost, and be more conducive to tracking the fluctuation of the index.
In addition, most ETFs do not need redemption fees, which can also reduce the management cost of ETFs. These are the characteristics of passive management.
To sum up, why do ETFs rarely pay dividends? ETF has no alpha value mainly because of its passive management characteristics and investment strategy of replicating index. ETF generally adopts the method of suspending dividends and reinvesting the dividend income in the fund portfolio, so as to increase the net value of the fund, reduce the management cost and be more conducive to tracking the fluctuation of the index.