Does bid-ask spread matter with automatic reinvestment?

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jmk
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Does bid-ask spread matter with automatic reinvestment?

Post by jmk » Wed Sep 20, 2017 9:48 am

Please forgive the noob question, but does bid-ask spread matter with automatic reinvestments of ETFs? I ask because I try to avoid rebalancing VSS since it has a fairly large spread. Yet I have it set for automatic reinvest rather than sending money to my MM account where I could re-invest it in underperforming mutual funds. Am I acting on a false assumption that my costs would be higher if I did the latter?

livesoft
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by livesoft » Wed Sep 20, 2017 9:52 am

Automatic reinvestment of dividends paid by ETFs is tricky and there is no one way that is always better.

I think the costs are dominated by round-off error and how your broker decides when to buy and what price to pay not by the bid/ask spread.

Here is a thread about round-off error, in this case a 42% round-off error: viewtopic.php?t=208793

I happen to have automated dividend reinvestment set for VSS in some accounts and not in other accounts, so I have some experience making comparisons. My experience is that my brokers (including Vanguard) pay more for shares than I pay when I do it manually.

I think in a rising market there is probably more drag from not having the full dividend reinvested with partial shares and having cash sit idle in your cash sweep account, than any round-off error or bid/ask spread.
Last edited by livesoft on Wed Sep 20, 2017 9:59 am, edited 2 times in total.
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oldcomputerguy
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by oldcomputerguy » Wed Sep 20, 2017 9:56 am

jmk wrote:
Wed Sep 20, 2017 9:48 am
Please forgive the noob question, but does bid-ask spread matter with automatic reinvestments of ETFs?
I believe it does. According to Vanguard, they re-invest dividends using market orders, which I believe will be subject to bid-ask spreads. (You didn't mention, but I assume you hold this ETF at Vanguard.)
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livesoft
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by livesoft » Wed Sep 20, 2017 10:10 am

oldcomputerguy wrote:
Wed Sep 20, 2017 9:56 am
I believe it does. According to Vanguard, they re-invest dividends using market orders, which I believe will be subject to bid-ask spreads. (You didn't mention, but I assume you hold this ETF at Vanguard.)
Thanks for the link. There is NO bid/ask spread at the opening cross when Vanguard executes the order for dividend reinvestment, so the bid/ask spread does not come into play when Vanguard is one's broker:
"Brokerage will attempt to purchase the reinvestment shares by entering a market order at the market opening on the payable date."

When looks that the price per share paid for a Vanguard reinvested dividend, one's records should show the historical opening price for that day. Other brokers do something different.
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oldcomputerguy
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by oldcomputerguy » Wed Sep 20, 2017 10:14 am

livesoft wrote:
Wed Sep 20, 2017 10:10 am
oldcomputerguy wrote:
Wed Sep 20, 2017 9:56 am
I believe it does. According to Vanguard, they re-invest dividends using market orders, which I believe will be subject to bid-ask spreads. (You didn't mention, but I assume you hold this ETF at Vanguard.)
Thanks for the link. There is NO bid/ask spread at the opening cross when Vanguard executes the order for dividend reinvestment, so the bid/ask spread does not come into play when Vanguard is one's broker:
"Brokerage will attempt to purchase the reinvestment shares by entering a market order at the market opening on the payable date."

When looks that the price per share paid for a Vanguard reinvested dividend, one's records should show the historical opening price for that day. Other brokers do something different.
Thanks. I'd be the first to admit that I don't know everything about all this, today I learned something new.
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deltaneutral83
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by deltaneutral83 » Wed Sep 20, 2017 10:20 am

livesoft wrote:
Wed Sep 20, 2017 9:52 am
Automatic reinvestment of dividends paid by ETFs is tricky and there is no one way that is always better.

I think the costs are dominated by round-off error and how your broker decides when to buy and what price to pay not by the bid/ask spread.

Here is a thread about round-off error, in this case a 42% round-off error: viewtopic.php?t=208793

I happen to have automated dividend reinvestment set for VSS in some accounts and not in other accounts, so I have some experience making comparisons. My experience is that my brokers (including Vanguard) pay more for shares than I pay when I do it manually.

I think in a rising market there is probably more drag from not having the full dividend reinvested with partial shares and having cash sit idle in your cash sweep account, than any round-off error or bid/ask spread.

I don't understand, wouldn't you have to execute your trade at precisely the identical time in account # 1 that your broker does in account #2 to get an accurate comparison? If I see that that TDA filled my reinvested divs on VTI at 11:56:08 I can easily go back and look at a minute by minute to "check" so to speak to make sure I didn't pay a few pennies more than the ask. For VTI/VXUS it really doesn't matter as the spread is a penny (unless there is something more nefarious going on with brokerages than simply firing off a market order?). VSS and VBR might be a little different in that it can be 15 cents so I can see how a market order for reinvested divs by the broker in that case could add up over 30 years.

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Re: Does bid-ask spread matter with automatic reinvestment?

Post by livesoft » Wed Sep 20, 2017 10:20 am

And to give you an idea of round-off error:

On 6/27/2017, the opening price for VSS was $107.83. A dividend of $155.85 bought 1.445 shares, but 1.445 x 107.83 = $155.81 and $155.85 / $107.83 = 1.4453, so I didn't get 0.0003 shares that I should have gotten.

On 3/28/2017, the opening price for VSS was $102.61. A dividend of $13.99 bought 0.136 share, but 0.136 * 102.61 = $13.95 and
$13.99 / $102.61 = 0.1363, so I didn't get another 0.0003 shares that I should have gotten.

Sometimes the round-off error goes the other way.
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livesoft
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by livesoft » Wed Sep 20, 2017 10:25 am

deltaneutral83 wrote:
Wed Sep 20, 2017 10:20 am


I don't understand, wouldn't you have to execute your trade at precisely the identical time in account # 1 that your broker does in account #2 to get an accurate comparison? If I see that that TDA filled my reinvested divs on VTI at 11:56:08 I can easily go back and look at a minute by minute to "check" so to speak to make sure I didn't pay a few pennies more than the ask. For VTI/VXUS it really doesn't matter as the spread is a penny (unless there is something more nefarious going on with brokerages than simply firing off a market order?). VSS and VBR might be a little different in that it can be 15 cents so I can see how a market order for reinvested divs by the broker in that case could add up over 30 years.
1. I don't want an accurate comparison. I want to buy at a lower price. Of course, I am not trading at the same time as automated reinvestment happens. The fact that Vanguard uses the opening cross does mean that if I bought shares at the same time, then I would get the same price that Vanguard gets. But I think I can buy the day before when I get the dividend while Vanguard has to wait until the next morning.

2. Beware that the time posted by TDA for trade executions can change between first posting and a few days later.

I personally believe that brokers at TDAmeritrade buy shares of VSS and then sell them to their clients at a higher price and pocket the difference. Of course, they cannot make it look incredibly obvious that they are doing this.

3. Fidelity does something different from Vanguard and from TDAmeritrade.

4. One might select a broker based on how they do dividend reinvestments if that is one's concern.

And here is the link to a Case Study thread on timely dividend payments:
viewtopic.php?t=87742 I'll save you from reading: Vanguard is the worst.
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jmk
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by jmk » Wed Sep 20, 2017 11:20 am

livesoft wrote:
Wed Sep 20, 2017 10:10 am
There is NO bid/ask spread at the opening cross when Vanguard executes the order for dividend reinvestment, so the bid/ask spread does not come into play when Vanguard is one's broker:
"Rounding error" isn't the same as bid-ask spread, and looks miniscule.

Ok, so if all that's true then I am probably wise to continue to let Vanguard reinvest my VSS dividends, only rebalancing at 25% band rather than rebalance with each dividend payment like I do with my other (mutual) funds.

Jonathan

deltaneutral83
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by deltaneutral83 » Wed Sep 20, 2017 11:31 am

livesoft wrote:
Wed Sep 20, 2017 10:25 am

1. I don't want an accurate comparison. I want to buy at a lower price. Of course, I am not trading at the same time as automated reinvestment happens. The fact that Vanguard uses the opening cross does mean that if I bought shares at the same time, then I would get the same price that Vanguard gets. But I think I can buy the day before when I get the dividend while Vanguard has to wait until the next morning.

2. Beware that the time posted by TDA for trade executions can change between first posting and a few days later.

I personally believe that brokers at TDAmeritrade buy shares of VSS and then sell them to their clients at a higher price and pocket the difference. Of course, they cannot make it look incredibly obvious that they are doing this.
Can one actually follow up on this(?), we all want a lower price, but isn't this essentially timing the market? I agree with your next statement about TDA (and probably other brokerages) in that they can freely post the time of execution and essentially post the lowest point of the day that they reinvest the divs regardless of when they actually submitted the trade. Problem is I don't know what a person could do about it. I had previously thought they just fired off limit orders for reinvested divs (on a 15 cent B/A) at about 3 cents less than the ask and get filled 99.99% of the time instantly as the mark will be closer to 7/8 cents or "in the middle" and bill the investor for the full ask price. There's just not much investors can do to prove that one way or the other is there?

livesoft
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by livesoft » Wed Sep 20, 2017 11:36 am

deltaneutral83 wrote:
Wed Sep 20, 2017 11:31 am
There's just not much investors can do to prove that one way or the other is there?
I agree that one accepts it or just manually reinvests.

Our smaller accounts are set to automatically reinvest, but our large accounts are set to take dividends in cash and we manually use them.

PS: I love market timing. It is not always bad.
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pshonore
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by pshonore » Wed Sep 20, 2017 11:48 am

Here's what Fidelity does:
Fidelity pre-identifies all customers that will be reinvesting their dividend and goes to the market to purchase shares three days prior to the payable date. We purchase as many shares as possible on a best-efforts basis, determine the average share price, and reallocate these shares proportionately to the customers that are reinvesting their dividend.
Over the years sometimes you get a good price (if there's a drop 3 days pay date) and other times you don't. I've noticed some iShares ETFs go ex-div three days before the pay date. June ex-div was 6/27 and pay date was 6/30. Thats cutting it close.

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Re: Does bid-ask spread matter with automatic reinvestment?

Post by Chuck » Wed Sep 20, 2017 11:58 am

If you reinvest dividends in a mutual fund, the fund has to purchase the underlying assets, and there will be a spread there, too. I don't think there's much of a difference. One you see very plainly, the other you don't.

jmk
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by jmk » Wed Sep 20, 2017 10:41 pm

Chuck wrote:
Wed Sep 20, 2017 11:58 am
If you reinvest dividends in a mutual fund, the fund has to purchase the underlying assets, and there will be a spread there, too. I don't think there's much of a difference. One you see very plainly, the other you don't.
I may ignorant but aren't mutual funds ought and sold at a single price at end of day? That is, there is no bid ask spread.

av8r316
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Re: Does bid-ask spread matter with automatic reinvestment?

Post by av8r316 » Wed Sep 20, 2017 11:02 pm

jmk wrote:
Wed Sep 20, 2017 10:41 pm
Chuck wrote:
Wed Sep 20, 2017 11:58 am
If you reinvest dividends in a mutual fund, the fund has to purchase the underlying assets, and there will be a spread there, too. I don't think there's much of a difference. One you see very plainly, the other you don't.
I may ignorant but aren't mutual funds ought and sold at a single price at end of day? That is, there is no bid ask spread.
Yes, but the fund needs to convert that cash reinvestment into shares by buying in the market.

If you reinvest an ETF holding, you see the price of the underlying transaction (excluding issuance/redemption and premium/discount).

If you reinvest a MF holding, you see the NAV, but you don’t see the price the fund pays to buy the underlying shares. Theoretically any difference shows up in the tracking error.

There are a lot of little nuances that become meaningful as the dollars get larger, particularly for something the size of a fund. Frankly, these are business issue of a fund, much like business issues of a “normal” company (i.e. pricing products and services). After all, there isn’t much conceptual difference between a fund dealing in stocks and bonds, and a “normal” company dealing in goods and services.

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