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.

  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Unit Trust - UT

    An unincorporated mutual fund structure that allows funds to ...
  4. Passive Management

    A style of management associated with mutual and exchange-traded ...
  5. Alpha

    Alpha is used in finance to represent two things: 1. a measure ...
  6. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
Related Articles
  1. Fundamental Analysis

    The Perks Of Dividend Reinvestment Plans

    These plans offer shareholders a way to directly invest in some of the top companies without the commissions.
  2. Fundamental Analysis

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  3. Investing Basics

    How Dividends Work For Investors

    Find out how a company can put its profits directly into your hands.
  4. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  5. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  6. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  7. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  8. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  9. Mutual Funds & ETFs

    Top 5 Health Mutual Funds

    Learn about the top five mutual funds that invest in stocks of companies that primarily operate in the health care sector of the United States.
  10. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  1. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  2. Do mutual funds pay dividends?

    Depending on the specific assets in its portfolio, a mutual fund may generate income for shareholders in the form of capital ... Read Full Answer >>
  3. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  4. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  5. Is a financial advisor allowed to pay a referral fee?

    A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and ... Read Full Answer >>
  6. Do financial advisors get paid by mutual funds?

    Financial advisors are reimbursed by mutual funds in exchange for the investment and financial advice they provide. A financial ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!