In order to understand the equalisation amount, let’s first clarify the structure of an ETF
In order to understand the equalisation amount, let’s first clarify the structure of an ETF.
An ETF is created in the primary market by delivering cash or equivalent securities to the issuer – ETF securities are then issued. The party responsible for the creation is eligible to receive distributions at the distribution date.
To ensure equal treatment of all investors when a creation is done, the creator also has to provide a cash amount equal to the accrued dividends in the fund at the moment that the creation is done. This cash contribution is not a dividend in nature and the amount shows in the income account as an “other” income. This is the equalisation amount as this is to ensure that all investors are treated equally.
When the ETF issuer makes distributions to holders, all the accruals in the income account must be distributed in terms of the Trust deed and regulated by the FSB. As explained, all the accruals are not dividends, so a small amount is distributed to holders as the equalisation amount as indicated in the SENS announcements and on the clients’ statements from brokers.
When redemptions of units happen prior to the distribution period, the entity that redeems then receives a cash portion equal to the dividends. From a fund accounting perspective, this is shown as dividends received as per the fund income account.
A negative equalisation amount is the cash that was paid out to the party that redeemed units. The ETF holder still receives the correct dividends due. This is a bit of an anomaly and a once off in the case of SYGUK securities, as the redemption happened just before the distribution date.
It is common for ETF creations and redemptions to happen in the primary market, as large institutional investors, including market makers in ETFs use this mechanism to enter and exit ETF holdings.
The creations and redemptions of all ETF issuers are very transparent as JSE rules require SENS announcements to be issued whenever there is a creation or a redemption of ETFs.
The specific redemption of the SYGUK securities was related to a market maker reducing the SYGUK holdings in specie just before the distribution date, and the cash portion to compensate for the fact that they will not be receiving dividends was paid out accordingly. This reduced the total dividends distributed (as evidenced by the negative equalisation amount). Important to note that all investors still received their fair distribution as the total holdings of the units were also reduced.
22/12/2017 - SENS Sygnia Itrix FTSE100 Index ETF Partial Delisting of SYGUK Securities
For more information, contact our Client Service Centre on 0860 794 642 or admin@sfs.sygnia.co.za.