With the system overhaul now requiring interest rate exchange-traded funds (ETFs) used like parking accounts (high-interest, on-demand deposit accounts) to pay distributions, experts are advising investors to factor in ex-distribution dates. An ex-distribution is when an ETF pays a distribution, causing the fund's net asset value (NAV) to fall by the amount of the distribution, and, in tandem, the price declines.
According to the financial investment industry on the 29th, Samsung Asset Management pays monthly distributions for interest rate ETFs such as KODEX CD 1-Year Rate Plus Active (synthetic), KODEX CD Rate Active (synthetic), and KODEX KOFR Rate Active (synthetic).
The record date for distributions on these interest rate ETFs is the last trading day of each month. Considering the two-trading-day settlement gap, in this month's case, investors who buy these interest rate ETFs by today will receive the distribution. However, the ex-distribution occurs on the 30th, the following day.
For example, KODEX CD Rate Active paid a distribution of 2,355 won per share last month. Two trading days before the record date, on the 26th last month, KODEX CD Rate Active closed at 1,075,515 won, and on the 29th, when the ex-distribution took place, it opened at 1,073,235 won. The price fell by 2,280 won, similar to the distribution.
It was the same for TIGER CD Rate Plus Active (synthetic) from Mirae Asset Global Investments, which pays monthly distributions. It paid 2,280 won last month, and the price fell by 2,235 won from a close of 1,002,240 won on the 26th to an open of 1,000,005 won on the 29th.
Interest rate ETFs track benchmarks such as the CD rate and the Korea overnight financing repo rate (KOFR). They divide the tracked rate by 365 and reflect it in the price daily. Considering the CD rate and KOFR at about 2.5% currently, investors can earn around 0.01% per day in interest. They are often used to manage idle cash in the short term.
Until now, interest rate ETFs did not pay separate distributions, but the Enforcement Decree of the Income Tax Act was amended this year, changing the situation. All ETFs must distribute interest and dividends at least once a year. This is why ex-distribution now occurs for interest rate ETFs.
Because distributions are treated as dividend income, those subject to the financial income tax should time their buys and sells carefully even with interest rate ETFs. A person at an asset management company said, "Distributions from interest rate ETFs are effectively a wash because of the ex-distribution," and added, "If the goal is to run an interest rate ETF short term, it may be advantageous to sell before the record date and buy on the ex-distribution day."
If the plan is to park money in an interest rate ETF for a long period, annual distributions are more favorable than monthly distributions because investors can benefit from compounding. RISE CD Rate Active (synthetic) from KB Asset Management and TIGER KOFR Rate Active (synthetic) from Mirae Asset Global Investments pay distributions once a year.
However, because these issues have larger ex-distributions than monthly payers, investors should keep the record dates in mind. TIGER KOFR Rate Active (synthetic) is scheduled for late Nov., and RISE CD Rate Active (synthetic) is scheduled for late Dec.