Dividend Drag

DEFINITION of 'Dividend Drag '

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.

BREAKING DOWN 'Dividend Drag '

This is a problem in a rising market, but the same SEC rule is beneficial in a declining market. Either way, this has been a problem in ETF circles, which have been pushing for the SEC to change the rules. If this happens, dividend drag will essentially disappear.

RELATED TERMS
  1. Dividend ETF

    Any exchange-traded fund that seeks to provide high yields by ...
  2. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for ...
  3. Dividend

    A distribution of a portion of a company's earnings, decided ...
  4. ETF Of ETFs

    An exchange-traded fund (ETF) that tracks other ETFs rather than ...
  5. Reinvestment

    Using dividends, interest and capital gains earned in an investment ...
  6. SEC Form S-3D

    A filing that publicly-traded companies must submit to the SEC's ...
Related Articles
  1. Mutual Funds & ETFs

    How Dividend-Paying ETFs Work

    Understand how ETFs that hold dividend-paying securities collect and pass along those dividends proportionally to the shareholders of the ETF.
  2. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  3. Investing Basics

    Got Dividends? Here's How to Reinvest Them

    Reinvesting dividends is almost always a good idea if you intend to hold your shares for the long term, and there are several ways to do it.
  4. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  5. Investing Basics

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
  6. Retirement

    Should Retirees Reinvest Their Dividends?

    Find out why dividend reinvestment may or may not be the right choice for retirees, depending on their financial needs and investment goals.
  7. Mutual Funds & ETFs

    Reinvesting Your Mutual Fund Dividends

    Learn the benefits of reinvesting your mutual fund dividends, their impact over time, and when it is better to take the dividend payments as cash.
  8. Mutual Funds & ETFs

    ETF Dividends: The Lowdown on How They're Taxed

    Here's the rundown on how different ETF dividends are taxed.
  9. Mutual Funds & ETFs

    What All Investors Should Know About ETFs

    ETFs have become popular for their versatility and variety, but that doesn't mean they're always the right choice and that they're all created equal.
  10. Mutual Funds & ETFs

    Advantages And Disadvantages Of ETFs

    You've probably heard that ETFs are better than mutual funds, but you need to consider all aspects before investing.
RELATED FAQS
  1. Does an ETF pay out the full dividend that comes with the stocks held in that ETF?

    Learn if ETFs pay out the full dividend that comes with the stocks held in that ETF. Understand the difference between qualified ... Read Answer >>
  2. Are ETFs required to pay out a percentage of income as dividends?

    The exchange-traded fund (ETF) is a relatively new investment vehicle, hitting the market in 1993. A fund company can create ... Read Answer >>
  3. What are the dividend reinvestment options for a mutual fund?

    Learn about the options that shareholders have for dividend distributions made by mutual funds and why a shareholder may ... Read Answer >>
  4. If I reinvest my dividends, are they still taxable?

    Take a brief look at how the Internal Revenue Service taxes different kinds of dividends, including taxation on dividends ... Read Answer >>
  5. Which is better a cash dividend or a stock dividend?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
  6. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center