About the OMXS30™ index during dividend season and how this affects Xact Bull and Xact Bear
Many of the indexes shown are price indexes. This type of index does not take dividends paid into account. Consequently when a company included in the index pays dividends, a price index will fall, despite the fact that an investor as owner of an index portfolio has received dividends equal to the reduced value of the index.
Example of how dividends affect a portfolio
- A person owns a basket with all the equities included in the OMXS30™ index. The basket is worth SEK 100. During the day the stock exchange stands completely still. The only thing that happens is that companies in the equity basket pay a dividend of SEK 1. The owner of the index basket therefore has no change in assets.
Morning portfolio: SEK 100 in the index portfolio
Evening portfolio: SEK 99 in the index portfolio and SEK 1 in cash
Total value of the portfolio is unchanged: SEK 99 + SEK 1 = SEK 100
Xact’s leveraged ETFs should be viewed as “portfolios”, as though the investor owned an equity portfolio. In an equity portfolio, the assets do not change when dividends are paid. The equity drops, assuming all other factors are equal, with the size of the dividend and the dividend is paid into a yield account. The portfolio (equity + cash dividend) is worth the same amount both before and after the dividend.
When comparing the performance of Xact Bull and Xact Bear with the OMXS30™ price index, it will look as though Xact Bull and Xact Bear did not follow the index. But this is only a mathematical effect of how a price index is calculated; it ignores the dividends paid. Unit-holders do not experience any wealth effect when the price index falls because of dividends paid; Xact Bear does not increase in value and Xact Bull does not fall in value.
OMXS30™ price index: -1%
Bull: + 0%
To measure how Xact Bull and Xact Bear perform compared to index, the funds are compared with the OMXS30™ GI (Gross Index), i.e the benchmark index for the fund. This index takes into account dividends paid, and therefore does not drop on ex.date for dividends. The performance of this index, is displayed on the NASDAQ OMX Stockholm website .
Divergence between futures price and price index
OMXS30™ futures track the OMXS30™ price index since the futures do not receive dividends from companies included in the index, nor do they pay dividends to the holder. The buyer of a futures contract knows this and therefore is not prepared to pay “full price” for the futures contract. If the value is SEK 100, but SEK 2 will be paid in dividend (which the futures holder will not receive), the buyer is therefore only willing to pay SEK 98 for the future. This means that the futures price is adjusted for all future dividends under the relevant contract. This can be compared with the OMXS30™ price index, which falls on the day when the dividend from the included companies is separated. As a result, futures can deviate from the index.
When the future is rolled into the next contract, the value of Xact Bull and Bear would fall, all else being equal, if the new contract has another lower price because of the discounted dividends. The effect would be that Bear would seem to have risen in value and Bull have fallen.
Since the funds can be compared with “portfolios” in terms of assets, which means they will not be affected when dividends fall or if they are going to fall, the fund’s futures holdings must be rebalanced. The manager adjusts the portfolio by buying or selling more futures equivalent to the “discount” (which corresponds with future dividends) in the futures price. Additional purchases or sales enable the fund to recover the reduced value, which can be compared with “adding back in” future dividends.
To measure how Xact Bull and Xact Bear perform compared to index, the funds are compared with the OMXS30™ GI (Gross Index), i.e the benchmark index for the fund.