Distributions And Sell Stops

Reader Tad made an important comment in regards to yesterday’s post. Here’s what he said:

I think you should make your readers aware of what happens to the NAV price when dividends and/or capital gains are paid out of a fund, as this might trigger an unwarranted trailing stop loss sale.

That is correct. When mutual funds/ETFs declare distributions, you have to adjust your high price, which is used to track the trailing sell stop point.

For example, let’s say you bought an ETF at $10. The markets meander but with an upward bias, and your holding hits a high price (since you purchased it) of $10.50. This figure becomes the point from which you measure the 7% stop loss.

If this fund now has a distribution of, say $0.20, the daily price (NAV) is reduced by that amount. If you are not aware of this, this may possibly trigger a sell signal, unless you adjust your high price downward as well. In this example, the high price was $10.50, which needs to be adjusted to $10.30.

Whenever you see a large price change in any of your holdings, be sure to check that it was related to market activity and not due to any distribution. Being aware of it, will help you make the right decision when it comes to liquidating your holdings.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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