Top 3 Questions From 1-800-iShares

iShares Blog: From time to time we’ll receive a question here on the blog or onTwitter that is difficult for us to answer due to legal restrictions (not to mention word and character limits – 140 characters don’t get you very far!).  In those situations, we’ll tell our followers they can get their question answered by reaching out to the iShares Sales Support (ISS) Desk at 1-800-iShares.

The ISS Desk isn’t your average “customer service center.”  Based in Jersey City, the desk supports over 400 exchange traded products including US and Canadian iShares as well as iPath ETNs.  Sales Specialists there have access to firm research, historical data and other information relevant in today’s market, and they work closely with investors of all sophistication levels – from the novice to the institutional investor.

To highlight the breadth of questions the ISS Desk receives on a daily basis, we asked the team to provide us with a sampling of topics they hear about regularly.  Not surprisingly, many of the frequently asked questions are related to our products’ distributions and returns.  Here are the top 3:

#1 Dividends, dividends, dividends

When do I have to purchase an ETF in order to receive the dividend?

ETF trades settle three business days after the trade date (T+3), so in order to receive the dividend investors must purchase an ETF at least one day before its ex-date (the date it goes ex-dividend) so that they satisfy the settlement period and are a holder of record on the record date.

Is the dividend pro-rated based on how long I’ve owned it?

Dividends are not pro-rated, and the fund’s price will be reduced by the distribution per share amount at market open on the ex-dividend date.

When do your funds go ex-dividend, and how much will they pay?

We don’t declare or estimate any of our distributions, but you can find our payment schedule on the homepage of (and here).

#2 Returns confusion

What is the difference between market price and total return on

Total return represents changes to the net asset value (NAV) and accounts for distributions from the fund. Market price return also includes the fund distributions, but instead of NAV, the midpoint price is used. The midpoint is the average of the bid-ask prices at 4:00 PM ET.

#3 To distribute or not to distribute

Why didn’t the iShares Barclays TIPS Bond Fund (TIP) pay a distribution in January, February, and March of 2012?

In order to answer this question, it’s important to first understand how the underlying securities – Treasury Inflation Protected Securities (TIPS) – work.    Since the objective is to provide protection against inflation, both the principal and interest of TIPS increase with inflation and decrease with deflation.  When investors own TIPS outright, they don’t receive the principal adjustment until the bond matures.  This adjustment is sometimes referred to as “phantom income”, because the investor must pay tax on it even in the years preceding maturity.

Now compare this to TIP, which is a portfolio of TIPS.  The ETF’s distribution is made up of two components – the interest earned on the underlying TIPS and the inflation-adjustment made to the principal on the underlying TIPS (as measured by changes in the Consumer Price Index, or CPI).  If CPI is positive, it positively affects TIP’s distribution.  If CPI is negative, it’s deducted from TIP’s distribution.  Because of this, when deflation is present, it’s possible for TIP’s distribution to fall or even go to zero.

This happened to the distributions for January, February, and March of 2012, as the CPI numbers that coincided with these payments were negative, indicating deflation (note that there is a 3-month lag between CPI being released and that number affecting the fund – see below).  Since then, an uptick in inflation has brought TIP’s distributions back above zero.  The upshot?  Instead of paying tax on the phantom income, as you would when you own TIPS outright, you actually receive the adjustment to principal in the form of income.

TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, not iShares exchange traded funds.  There is no guarantee that dividend funds will pay dividends.

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