Rumor Has It

Summary

• There seems to be some confusion about distribution/dividend yields related to expense ratios and how they are involved - hint: they aren't.
• Returns and expense ratios might be getting twisted together and propagating this misconception.
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Rumor has it that some investors might be getting dividend/distribution yields confused with returns. In which case, it is then leading to some confusion that you have to subtract an expense ratio from a yield.

That just simply isn't the case. If a fund is paying a 10% dividend at $1 a year, meaning it is priced at $10 per share, then that is what you receive at the end of the year. Of course, that is suggesting that they don't cut or boost the distribution over the course of the year as well.

Some individuals believe when they see an expense ratio of 1% that somehow it translates into that fund's yield only being 9%. I don't even think we should say something along the lines of "distributions are net of fees" - because fees aren't even involved in a fund's yield at all. Just remove it completely from being associated.

I think the confusion comes from when we start looking at returns of a fund.

Just because a fund is paying out 10% in distributions, that doesn't mean that is what the fund will earn or return to investors. It could, in fact, even produce a loss for the year. Closed-end funds especially can pay out what they want, when they want - for however long they want to.

Now if a fund would have otherwise had total returns of 10% in a year if it wasn't for an expense ratio bringing total return down to 9% - presuming a 1% expense ratio to keep things simple. Then that is a different story.

However, even then, when we look at total return figures - I'm not aware of any website or fund that shows "gross" returns. Meaning, the returns shown are net of fees and expenses. So that can cause some more confusion as well, so might as well nip that in the bud right away too.

Here is some common disclosure language following an illustration of performance metrics. This is from BlackRock:

“Returns are shown net of advisory fees paid by the fund and net of the fund’s operating fees and expenses. Investors who purchase shares of the fund through an investment adviser or other financial professional may separately pay a fee to that service provider. Past performance is not indicative of future results.

There you have it; "returns are shown net of advisory fees paid by the fund and net of the fund's operating fees and expenses.” It would be incredibly dishonest to do so otherwise. Perhaps that was the case at some point in history when financiers were more swindling in nature - however, that just isn't the case anymore.

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Income Generator portfolio distribution history

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