As most of us would be well aware, the S&P/ASX 200 Index (ASX: XJO) had a stunningly positive month over January. Between 31 December and 31 January, the ASX 200 went from 7,038.7 points to 7,476.7 points. That's a jump worth a healthy 6.2%.
But let's check out the Vanguard Australian Shares Index ETF (ASX: VAS).
The Vanguard Australian Shares ETF is the ASX's most popular exchange-traded fund (ETF). It doesn't exactly track the ASX 200, instead going for the larger S&P/ASX 300 Index (ASX: XKO). But the ASX 300 has historically gotten similar, if not slightly better, returns than the ASX 200.
But not over January, it seems. While the ASX 200 recorded a nice 6.2% gain, Vanguard Australian Shares ETF units seemingly underperformed. The ETF ended 2022 at a price of $87.70. But by the end of last month, it has risen to only $92.44.
Sure, that's still a gain worth 5.4%. But it's close to a percentage point off the broader market returns. And that's not what ETF investors sign up for when they buy an index fund.
So what's going on here? Is the Vanguard Australian Shares ETF broken?
What happened with the Vanguard Australian Shares ETF in January?
Well, fortunately, there seems to be a relatively simple explanation here. Because ASX index funds like this Vanguard ETF hold ASX dividend shares, they also tend to pay out dividend distributions.
In this ETF's case, investors can look forward to a dividend distribution every quarter When an ETF pays out a dividend distribution, it goes through the same process as a normal ASX dividend share.
There's an ex-dividend date, followed by a payment date. As any dividend investor would know, an ex-dividend date normally results in a sharp drop in a company's (or ETF's) share price.
It so happens that the Vanguard Australian Shares ETF paid out its latest dividend distribution on 18 January. The ex-distribution date for this payment was 3 January.
This payment was worth 74.97 cents per unit, the value of which left the Vanguard unit price on 3 January. If you look carefully, you'll be able to see it here:
If we take the value of this distribution, we can see that it would have represented a yield of 0.87%, based on the last Vanguard unit price before the ETF went ex-distribution.
That happens to be almost exactly the same as the shortfall between the Vanguard Australian Shares ETFs' January performance compared to the ASX 200 Index.
The ASX 200 Index doesn't factor in dividend returns, so, unlike the Vanguard ETF, it didn't fall in value in January on any dividend payments.
So this is the most likely explanation as to why the Vanguard Australian Shares ETF 'underperformed' the ASX 200 Index over January. Factoring in those dividend distributions, the returns were almost identical, as investors would expect.
So it all came out in the wash. It just doesn't look that way by analysing the prices alone.
