Vanguard is criticizing Barclays’ iShares Dow Jones Select Dividend Index (DVY) exchange traded fund, saying not all of the dividends qualify as a tax break. The ETF is one of several that the industry advertised as a way to capitalize on 2004 tax cuts.
According to the article in Ignites, DVY was affected by one-time events. The ETF was rolled out in November 2004 and went through rapid shareholder expansion, with plenty of redemption activity. There was also higher than normal portfolio turnover because the dividend benchmark changed its component list from 50 to 100 companies.
Vanguard says their ETFs aren’t effected by steep turnover. "Since our ETFs are structured as separate classes of the company’s index funds, an uptick in turnover for the ETFs will rarely be big enough to impact the overall fund."
Barclays says most of the dividends in the ETF qualify now and the amount that Vanguard is focusing on is just pennies to the dollar.
The jury is still out on this and we’ll have to report back at the end of the year.
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