Suppose one component stock of an ETF gives out dividends at the end of day T. How does the ETF handle it? Does it add this dividend to its cash component before the beginning of day T? before the beginning of day T+1? Does it use the dividend to re-invest all the components of the ETF? Or are there any other situations I am not aware of here?
If a stock that an ETF holds pays a dividend then the ETF deals with the tax implications and income but that's the extent of it. Think about it this way. An ETF tracks an index. All the ETF does is invest in such a way that your share of the ETF tracks exactly (or as close as possible) to the index. All the ETF does is look at the % weightings of each stock in the underlying index and adjust accordingly. Since indexes don't hold cash the dividend payment is just re-applied back to making sure that the ETF's stock basket is proportionately allocated to the index weightings.