How ETF Structures Impact Your Dividends
Where are my dividends? It's a question that comes up whenever dividend payments don't hit our investment accounts when we expect.
With exchange-traded funds (ETFs), the timing of your dividend payments is definitely impacted by a subtle but important detail: the fund's legal structure.
ETFs generally use the following types of structures: Open end fund, unit investment trust, grantor trust, partnership, or ETN. Besides the timing of dividends paid, each kind of structure has its own unique set of financial risks, tax treatment, and consequences. Since this article is about dividends, let's focus on that.
Popular ETFs like the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), SPDR S&P 500 (NYSEARCA:SPY), and the SPDR S&P MidCap 400 (NYSEARCA:MDY) are organized as unit investment trusts or "UITs." Why does this matter? Because the UIT structure does not reinvest dividends in the fund, but instead holds dividends until they're paid to shareholders, typically every quarter.
The table below illustrates this. You'll notice how there's a 2-4 weekly delay for DIA, MDY, and SPY between the record date and the actual dividend payment date. 
UITs must fully replicate the indexes they track and receiving income from loaned securities is not permitted.
If we contrast the SPY ETF with one of its direct peers, the iShares Core S&P 500 ETF (NYSEARCA:IVV) you'll instantly notice how the timing of dividend payments is different.
IVV's final dividend payment of 0.92 cent per share in 2012 was paid on 12/26 to shareholders of record on 12/21. Why so much faster than SPY? It's because dividends in open end funds like IVV are immediately paid to shareholders, whereas SPY's unit investment structure holds onto dividends thereby creating a dividend drag. What's the bottom line?
For investors who are still in the accumulation phase of their investment plan, none of this might matter. But to income dependent retirees who are counting on timely dividend payments to sustain their lifestyle, the timliness of dividend payments does make a difference. And for that reason, it might make better sense from a dividend perspective for this latter group to stick with ETFs that follow an open-end structure. This is especially true if you don't want any delays in the timing of your dividend payments.
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