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Claims such as “equalization reserves are just the principal disguised as dividends” and “high-dividend ETFs are all scams” are often the subject of heated debates among investors. To determine whether the design of the equalization reserve mechanism is deceptive, we must first understand why dividends are distributed from funds.
Dividends distributed from investment funds or ETFs, in essence, are “withdrawing money from the investor’s account on behalf of the investor,” which is similar to the investor selling a portion of their holdings. Naturally, when a fund makes a distribution, its net asset value (NAV) decreases. Simply put, dividend distributions are not extra interest earned by the fund but a mechanism that automatically withdraws money from the investor’s account.
For many retirees, maintaining a stable cash flow and a certain level of assets provides a sense of financial security. Due to this, they prefer distributing funds or ETFs, as these offer passive and relatively stable cash flow, which helps alleviate the psychological pressure of having to actively sell holdings. To meet market demand, some mutual funds even distribute dividends from the principal, ensuring that dividend payouts are unaffected by market volatility. In contrast, accumulation funds are more appealing to investors with employment income, as all gains are automatically reinvested, maximizing the compounding effect.
In other words, whether a fund distributes dividends is neither good nor bad; it is purely a tool selected based on an investor’s needs at different stages of their life. As long as fund managers provide transparent disclosures and investors understand the nature of dividend distributions, both dividend distributions and dividend sources serve legitimate functions.
So, what exactly is this much‑debated “equalization reserve”? In short, an equalization reserve is an accounting system used to equalize the distribution of dividends. When a fund or ETF receives significant new subscriptions prior to a distribution, new investors are able to share in the income accumulated over time in their ETF accounts (such as dividends paid by companies), thereby diluting the payout to existing investors. For example, if an ETF originally received NT$200 million in dividends in the past quarter intended for distribution to existing holders, a surge in subscriptions before the dividend payout would significantly increase the number of beneficiaries. This naturally results in a reduction in the amount that each individual receives. For investors who rely on dividend payments to cover living expenses, this “smaller payout” can cause cash flow inconvenience. To be fair, fewer dividends mean that more net asset value remains in the account. While ETF investors are not losing any money, they may need to sell a portion of their holdings to cover living expenses, which could cause inconvenience.
The purpose of the equalization reserve is to prevent non-market volatility factors from affecting dividend distributions. When new investors join, a portion of their subscription funds is allocated to an equalization reserve. This reserve is used to cover dividends payable to new investors, ensuring that existing investors are not affected by reduced payouts. Therefore, an equalization reserve does not generate additional income, nor is its purpose to disguise the principal as interest. An equalization reserve is simply an accounting mechanism used to ensure a fair distribution.
Although the equalization reserve mechanism itself is not a scam, it may be misused. A fund manager who draws heavily on an equalization reserve within a short period to boost the distribution rate to a level unsustainable for the fund over the long run may mislead investors into believing that the fund has stable, high dividends, prompting them to buy in. To prevent such situations, authorities have strengthened regulatory oversight in recent years. For example, the Financial Supervisory Commission requires that ETFs prioritize distributions from actual dividends, interest income, and realized capital gains when distributing dividends using an equalization reserve. Additionally, an equalization reserve may only be activated under specific circumstances, with its usage limits and justifications documented and explained within internal control mechanisms. At the same time, the Securities Investment Trust & Consulting Association has released practical guidelines for equalization reserves, highlighting examples of non-compliance to help fund managers adhere to the rules. The Taiwan Stock Exchange also requires fund managers to disclose dividend sources (including dividends, interest, equalization reserves, realized capital gains, and other income components) on the Market Observation Post System, thereby enhancing transparency in ETF dividend information disclosure. These regulations have significantly reduced the possibility of using the equalization reserve mechanism for “high dividend payouts” to attract investors.
In addition to relying on regulatory oversight and industry self-discipline, investors are advised not to chase high investment distribution figures. Instead, they must understand the nature of the investment instruments, the sources of dividends, and their own financial needs. Investors seeking stable cash flow may opt for dividend funds or ETFs. If the distribution source includes equalization reserves or principal, it often indicates more stable payouts; however, it does not guarantee higher returns. Investors who are still accumulating assets may opt for accumulation funds to benefit from compounding effects. There are no correct answers in investing; only what is suitable for each investor.