Accumulating vs Distributing ETFs

Accumulating vs Distributing ETFs

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Let’s take a look at the difference between accumulating and distributing ETFs together with the advantages and disadvantages of each. Deciding which one you should pick will depend on your own preference but it is very likely that the tax situation in your country will have a high impact on the decision-making process. Let’s understand why!

Accumulating ETFs

You should be able to recognize accumulating ETFs when the name of the fund ends with “(acc)”. In the case of accumulating ETFs, dividends that are paid out by the companies which make up the ETF are reinvested automatically by the fund manager. In conclusion, they will never be credited to your account but instead the fund size will grow which will make your ETF shares more valuable. Even though you will not notice when the dividends are reinvested (because this happens throughout the whole year), if you take a look at the long-term increase in share prices you can see the difference between accumulating and distributing ETFs very clearly. Comparing charts will be shown at the end of the post if you are interested! If you want to know the actual dividend yield of an accumulating ETF you can always check the yield of the distributing counterpart.

This means that you never have to think about reinvesting the dividends yourself. Even more important, in a lot of European countries dividends are taxed higher than capital gains. In my country, Belgium, dividends are taxed at 30% but we don’t have to pay capital gains. This means that investing in accumulating ETFs is very beneficial tax-wise and if you take a look at the ETF portfolio that I am going for you can see that I only want to buy accumulating ETFs.

Distributing ETFs

By now this could already be very obvious. Distributing ETFs distribute the dividends that the underlying stocks pay out. Distributing ETFs can be recognized by ending with “(dist)”. In this case, dividends will be credited to your account in cash, in a lot of countries, this is a taxable event. If you want to create some passive cash flow this could be an option for you. Do take into account that selling some shares from time to time with an accumulating ETF should have the same effect as getting dividends and could be tax beneficial. However, this is research you can only do yourself since it is country-specific. 

Comparison

Accumulating ETF

This is the 5-year return chart of IWDA. This ETF tracks the MSCI World index. IWDA is an accumulating ETF. The total 5-year return on the share price was around 66%.

This is the 5-year return chart of an ETF that tracks the same MSCI World index. The only difference is that this is a distributing ETF. The total 5-year return on the share price was around 50%.

Distributing ETF

As you can see the reinvested dividends are clearly noticeable in the returns over time. Of course, if you take the return of the distributing ETF including dividends, you would have gained roughly the same amount. (but in my case I would have paid taxes!)

Hopefully, now you understand the difference between accumulating and distributing ETFs. The graphs are from a website called JustETF. If you have any more questions don’t hesitate to ask!

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3m 8210 mask
3m 8210 mask
1 year ago

Impressive! Thanks for the post.
Best regards,
Boswell Raahauge

Ali
Ali
1 year ago

Thankyou for the post. Very helpful.

For the case of Belgium, so by investing in accumulating ETFS you dont have to pay any taxes on gains?
For example, if I invest through Degiro broker in accumulating ETFs, I dont need to pay any additional taxes on returns?
I am from Belgium (beginner invester), thats why asking.

tnx to let me know

Ali
Ali
Reply to  Michiel
1 year ago

Thanks Michiel. Its clear.

James Teo
James Teo
1 year ago

Hi there, I was comparing the price performance of IWDA Vs IWRD but it seems that IWRD constantly outperform IWDA, I did this comparison on Google charts so isn’t distributing better even without dividend? Comparing a 5 y performance as of 04/06/20 IWRD recorded a 55.9% increase while IWDA recorded a 38.87% increase

Vincent
Vincent
1 year ago

Hi Michiel

Beginning invester from Ghent here. I opened an account with Bolero end February this year and my plan is to DCA on VWCE. Since VWCE is on the German stock exchange, it costs € 15 for every buy. I plan to buy every 3 months to lower this cost.
What’s your opinion on VWCE?

Best regards
Vincent

Vincent
Vincent
Reply to  Michiel
1 year ago

I thought, probably wrong, that there were drawbacks to a foreign broker, which is why I went for Bolero. At that time I also did not know that VWCE existed, I was planning on buying VWRL.

Vincent
Vincent
1 year ago

Something that just now occurred to me: maybe I should follow the same advise I took to heart for my pension funds and invest just once a year in January (https://www.tijd.be/netto/pensioen/storten-in-januari-levert-een-grotere-pensioenspaarpot-op/10086828.html). That way the additional cost of the German stock exchange less important. What’s your take on that idea? Or is the opportunity cost at play (because my money is sitting idle on the bank)?

Vincent
Vincent
1 year ago

Great reply, thanks for your insight!

Vincent
Vincent
1 year ago

Hi Michiel, your stalker again ?
Probably a stupid question, but how can you tell that your portfolio of accumulating ETF is gaining in value? When I multiply the amount of VWCE I bought with the current price I get the exact value of my portfolio. I thought the value of your portfolio would increase independent of the current price of the ETF somehow?

Vincent
Vincent
Reply to  Michiel
1 year ago

I’m very new to this, so you’re absolutely right that I don’t grasp the concept of accumulation.
So, the price increase of a share in VWCE increases based on 2 things: the market (people buying or selling shares) AND dividends that are used by vanguard to buy more company shares for VWCE.

Does this mean that the price of a share of VWCE will eventually exceed the price of VWRL, because not everyone buys more shares of VWRL with their dividends?

Vincent
Vincent
Reply to  Michiel
1 year ago

Can’t say I fully grasp it, but it clearer now anyway. Thanks for that. What I don’t understand yet is the underlying value. VWCE has like 3.000 + companies, nobody knows the true underlying value do they? Nobody knows how the stock markets move (man and dog reference, where stock market is the dog and man the economy)? You buy and hope it will go up (eventually), magically somehow.

Vincent
Vincent
1 year ago

Maybe it’s easy for you ? VWCE, like VWRL, invests in 3421 companies (percentages). I can’t find anywhere how many shares are issued. But even when I did, I’d need a very large dynamic spreadsheet to keep track of the actual value of the shares of all those companies by percentage.

Maybe professional investors have tools to keep track of this to know when an index fund ETF is undervalued, but I doubt investors like that are interested in trackers like VWRL. S&P500, maybe, but all world trackers with a spread as large as VWRL seem to be something for the not so professional (active), not so all knowing investor.

But I’m probably wrong, or only half right ?

Dany
Dany
1 year ago

Hi Michiel,

Firsr of all, congratulations on your website. It is very easy to read. I came across your website searching about the difference between Accumulating Vs Distributing ETFs. This because of the way dividends are taxed in Belgium. And to my surprise after reading more I quickly realised you are from Belgium too. Beginner investor here.

What made you pick the IWDA ETF ? Any advantages picking this one vs VWCE? I don’t see a lot of differences besides the inclusion of emerging markets in the VWCE?

Thanks, looking forward to more posts 🙂

shai grosfeld
shai grosfeld
11 months ago

Hi Michiel,

first thx for all the info :), im a new invester from israel and im trading with IB broker so i can trade somewhat cheeply in the NYTE (in israel it quiet expansive..).
any way, i want to invest for long time (30+ years) and i discover that with dividend investing i got 47.5% tax in total! (30% from usa + 25% from israel). so the accumulating index etf, as i see it, is the way to go for me but the problem is that i have not found any accumulating ETF in the NYSE (for S&P\QQQ\DOW etc..), can you please tell me how can i find those type of etf? where sould i look for them?

Shai,

Colin
Colin
10 months ago

Hi Michel.

Nice article. Thanks.
You stated back in April: “In Belgium, we don’t pay capital gains tax at all.”

I think we need to make a distinction for accumulating funds containing more than 10% of assets in fixed interest securities. These funds are subject to 30% tax (Reynders-tax) on the capital gain of the fixed interest component of the fund upon sale.

I currently do a few quick calculations when deciding for accumulating versus distributing EFTs, taking into account for example, %bond component, historical dividends paid for DIST version (not that there is a guarantee the trend will continue), …

What are your thoughts?
Thanks.

All the best, Colin

Colin
Colin
10 months ago

Thanks for your quick reply Michiel.
I use a few bond funds – Government Gilts (I’m older 🙂
I try to keep them separate from my other EFTs (ie, like you, I aim for 100% equities in my other EFTs).
Enjoy “the journey”.