ETF Dividend Cycles

27 Pages Posted: 28 Feb 2023 Last revised: 10 Aug 2023

See all articles by Pekka Honkanen

Pekka Honkanen

University of Georgia - Terry College of Business

Yapei Zhang

ShanghaiTech University - School of Entrepreneurship and Management

Tong Zhou

ShanghaiTech University - School of Entrepreneurship and Management

Date Written: August 9, 2023

Abstract

Exchange-traded funds (ETFs) collect approximately 7% of all U.S. corporate dividends, which they are required to redistribute to investors. How do the funds manage these dividend flows, and does such management have spillover effects on other financial markets? In this paper, we document a new stylized fact of the "ETF dividend cycle:" ETFs gradually invest in money market funds (MMFs) when they accumulate dividend receipts and periodically withdraw from MMFs when they distribute dividends. This cycle creates periodic liquidity shocks to MMFs and, consequently, to the Treasury markets as the affected MMFs liquidate some of their short-term Treasury holdings to satisfy ETFs' dividend-driven withdrawals. As a result, ETF dividend cycles can explain flows to MMFs and fluctuations in Treasury yields.

Keywords: Exchange-Traded Funds, Money Market Funds, Dividends, Treasury Markets, Spillover Effects

JEL Classification: G12, G23

Suggested Citation

Honkanen, Pekka and Zhang, Yapei and Zhou, Tong, ETF Dividend Cycles (August 9, 2023). Available at SSRN: https://ssrn.com/abstract=4367698 or http://dx.doi.org/10.2139/ssrn.4367698

Pekka Honkanen (Contact Author)

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

Yapei Zhang

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

HOME PAGE: http://https://yapeizhang.com

Tong Zhou

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

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