Equities Trade “DIRTY” – What that Means and Why it Matters

Overview: The purpose of this whitepaper is to educate readers about a flaw in our market structure, that causes income-producing securities to trade “Dirty." Dirty security pricing causes investors to pay inflated values for income-producing securities and then...

This article explains how investors are subjected to ever-increasing investment losses as the payment period progresses due to “Dirty” security pricing. Savvy investors will purchase and sell a traditional investment fund on the ex-dividend day ONLY and will inquire with the fund manager about the amount of capital gain included in the NAV prior to purchasing any investment fund. Ascertaining the amount of realized income that has accrued to a fund’s NAV prior to a purchase is a necessary evil for any security that trades “Dirty.”

An investor’s returns are inversely correlated with the amount of realized income that the fund has accrued. As time passes, the amount of realized income that becomes part of the net asset value (NAV) grows. As the realized income grows – so do investor losses.

The chart above titled “After-Tax Return of a Traditional Fund by Week of Purchase” shows the after-tax investment returns that an investor would realize if they purchased an investment fund that accrues a $.835 per share dividend over twelve weeks from a starting NAV of $100.00 per share. The chart shows the after-tax return realized by investors if this fund was purchased in each of the twelve weeks at the market NAV for that week and will apply a 40% tax rate. For example, if an investor buys this security in week three, they will earn a .28% after-tax return, or if an investor buys this fund in week eleven, they will earn a negative (.20%) after-tax return.

This chart makes it very clear that investors should purchase income-producing assets as early in the payment period as possible. Early in the payment period is when there is the least amount of accrued realized income in the NAV. When investors “buy” realized income as part of their purchase, they will owe taxes on their capital investment when the realized income they bought is returned to them in the form of a taxable distribution. So, you want to reduce/avoid your purchases of realized income such that your unnecessary tax liability can be minimized.  The chart demonstrates the punitive effect of the increasing and unnecessary tax liability associated with the accumulation of the realized income.

In fact, the chart above shows that not only are your returns diminished but that you can actually lose money as the returns go negative around week seven.

The chart above titled “After-Tax Return of a Traditional Fund by Week of Purchase – With a 1.5% Capital Gain” factors in a 1.5% capital gain into the NAV.  If we assume our investors are buying in the 4th quarter of the year, they will most likely be purchasing a fund that has embedded capital gains. A 1.5% capital gain is small by historical standards. Now investors are subjected to buying two different forms of realized income – capital gains and dividends. As you can see, the addition of capital gains completely wipes out an investor’s chance of a positive return.  All returns, no matter when the investor buys, are negative.

By stark contrast, the chart above titled “After-Tax Return of a FairShare Fund by Week of Purchase” shows the after-tax returns that an investor would realize in an identical fund that uses FairShares intellectual property. First, the returns are substantially higher. Also, and most importantly, none of the FairShare returns, by the week of purchase, are negative. FairShares can maintain a positive return profile because there is no realized income included in the price of a FairShares investment fund. Therefore, investors are not subjected to “buying dividends” – a risk that is disclosed in every investment fund prospectus.

It is also important for investors to understand why they should also consider selling investment funds on the ex-dividend day only. We have written a blog about avoiding excessive taxation that can be found HERE.

In conclusion, the best advice for when to purchase and sell investment funds is to purchase them as early in the year as possible, to minimize purchases of capital gains, and to only transact on ex-dividend days to avoid purchasing dividends. I do encourage all investors to call your investment fund manager before you purchase any traditional investment fund and inquire about the amount of realized income that is included in the NAV. By understanding the amount of realized income in the NAV, you can estimate your losses prior to your purchase or find another fund that has a lesser amount of realized income included in its price. Or, the best option would be to buy a fund using FairShares system and methods so that you can keep more of what you earn and avoid unjust taxation.

Follow us on Twitter @BuyFairShares as well as on LinkedIn.


Jeremy Roseberry


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