Why do ETF yields differ?

Q: The Vanguard S&P 500 (VFV) currently has a dividend yield of 1.44%, but the US-listed version of the same ETF has a yield of 2.01%. How can these two funds have such different yields when their underlying holdings are exactly the same? –Lindsay

A: The US and international equity ETFs from Vanguard Canada do not hold their stocks directly: they get their exposure by holding a US-listed ETF. The Vanguard S&P 500 (VFV), for example, simply holds the Vanguard S&P 500 (VOO), which trades on the New York Stock Exchange.

Since the underlying holdings of VFV and VOO are identical, you might expect the two funds to have the same dividend yield. Yet if you visit their respective websites you’ll find the published yields actually vary by 57 basis points. What gives?

More than one way to do the math

Turns out there are several ways to calculate a fund’s yield. Vanguard Canada uses the trailing 12-month yield, which it defines as “the fund’s cash distributions over the past 12 months divided by the end of period net asset value.” The last four quarterly distributions from VFV totaled $0.52905 per share, and the fund’s net asset value on April 30 was $36.63 per share. Divide the dividend amount by the NAV and you get 1.44%.

Yield calculations are done differently south of the border. Most US-listed ETFs publish what’s called the SEC yield, which was designed as standardized measure for mutual funds. The calculation is complex, because it accounts for expenses as well dividends received over the last 30 days. But many US sources declare it to be the most useful estimate of a fund’s current yield. In the case of VOO, the SEC yield is currently 2.01%, considerably higher than its trailing 12-month yield.

It’s worth noting that even Canadian ETF providers differ in the way they report yield. The iShares S&P 500 (XSP) reports a trailing 12-month-yield of 1.43%, almost identical to Vanguard’s. But the BMO S&P 500 (ZUE) lists a “portfolio yield” of 2.07%, much closer to the SEC figure. BMO defines portfolio yield as “the most recent income received by the ETF in the form of dividends, interest and other income annualized based on the payment frequency divided by the current market value of ETF’s investments.”

Fees and taxes take the rest

The difference between these two yield metrics explain some of the disparity, but there’s more to the story. I asked Vanguard for the full explanation, and they provided the trailing 12-month yield on VOO so we could make a an apples-to-apples comparison of the two ETFs. They reported that figure as 1.86%, which is still 42 basis points more than VFV’s. So what else is going on?

About 11 basis points of the difference can be explained by fees. VFV’s management expense ratio is 0.16%, while VOO’s is just 0.05%. (This highlights an interesting detail often overlooked by investors: managers use a fund’s income to pay fees and expenses and then pass on what’s left to unit holders. That makes management fees effectively tax-deductible in non-registered accounts.)

The remaining 0.31% is due to foreign withholding taxes. These don’t apply to a US-domiciled fund such as VOO, but the IRS takes a 15% cut of all dividends paid to foreign investors, including Canadian mutual funds and ETFs. If the stocks in the S&P 500 yield approximately 2.07% before fees (as suggested by BMO’s calculation), a withholding tax of 15% works out to exactly 31 basis points.

If you’re shopping for ETFs based on their yields, make sure the funds use the same methodology or your comparisons will be highly misleading.