ETF price drop after ex-dividend

In by Paul McKLeave a Comment

Paul McK

When a company pays a dividend, the share price of the company (typically) drops by the value of the dividend. Eg. share price is $1.00 and pays a 5% dividend (0% franked) so the share price goes to 95c.

Because an ETF is a basket of stocks that pay dividends at varying times (when compared to each company) what is the effect of a dividend payment of an ETF?

Unlike an individual company, where the company value has dropped by the profits paid out in dividend form and is therefore reflected in the share price, an ETF is collecting the dividends at varying times but retaining them until the ETF-maker decides to pay the dividend. So the ETF-maker benefits from holding the dividends paid, yet the value of the ETF drops as the underlying company values drop when the individual company goes ex-dividend.

So in theory if an ETF is trading at $1.00 and pays a 5c dividend, the price of the ETF ex-div should remain at $1.00? This is because the underlying companies have not lost any value.

Is this correct?