Lets 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 in the decision making process. Let’s understand why!
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 payed 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.
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.
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 an distributing ETF. The total 5 year return on the share price was around 50%.
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!