Exchange Traded Funds (ETFs) are versatile financial instruments that can be considered a hybrid between listed stocks and investment funds, as they replicate the performance of an index.
Essentially, an ETF is a collection of various assets such as stocks of different companies, commodities, bonds, or a blend of these, and they are traded on the market like listed stocks, earning them the alternative name of ‘listed funds.’
One of the key advantages of ETFs is their liquidity; investors can buy or sell them at any time during market hours, setting them apart from traditional investment funds.
In this article, we will delve into the different types of ETFs, particularly accumulating vs distributing ETFs, each classified based on how they treat the dividends they receive from the companies in which they invest.
Accumulating ETFs are distinguished by their practice of reinvesting the dividends collected from the companies in their portfolio, rather than distributing them among individual ETF participants. These dividends are reinvested proportionally across the entire basket of assets held by the ETF.
As a result, the ETF’s overall value, or assets under management, grows by the amount of the dividends received. This, in turn, leads to an increase in the value of each participant’s position within the ETF.
Distributing ETFs are known for their practice of periodically distributing dividends collected from the companies in their portfolio, typically on a quarterly basis. Through this approach, participants receive income regularly, similar to receiving dividends directly from a company.
The amount that each participant receives as dividends is directly proportional to the number of shares they hold in the ETF. This means that the more shares an individual owns, the greater their share of the distributed dividends.
List of accumulating and distributing ETFs
Here are some examples of accumulating and distributing funds:
|Index||Accumulating ETF||Distributing ETF|
|iShares Core MSCI World UCITS ETF USD||IE00B4L5Y983||IE00BKBF6H24 (Hedged)|
|iShares Core S&P 500 UCITS ETF USD (EUR)||IE00B5BMR087||IE0031442068|
|iShares MSCI Emerging Markets UCITS ETF||IE00B4L5YC18||IE00B0M63177|
|iShares Core MSCI Europe UCITS ETF EUR||IE00B4K48X80||IE00B1YZSC51|
|Global X Telemedicine & Digital Health UCITS ETF||IE00BLR6QB00||IE00BLR6QB00|
|Global X Video Games & Esports UCITS ETF||IE00BLR6Q544||IE00BLR6Q544|
How do you know what type of fund is the ETF?
Finding out the type of the fund depends on which broker or service provider you use. Some of the best ETF brokers may display the type in the name of the fund (i.e., you can find “acc” for accumulating or “dist” for distributing).
However, if the platform you use does not list the type of fund, you need to check the fund’s prospectus or details to find out its type.
Should you invest in an accumulating or distributing ETF?
When selecting the best ETFs for your needs, several factors should be taken into consideration, as outlined below.
If your primary investment objective is to capitalise on the power of compound interest and create a snowball effect to grow your capital over time passively, an accumulating ETF would be the most advisable choice. This type of ETF reinvests dividends automatically, promoting potential compounding growth.
However, keep in mind that there are various exchange-traded products, which can be quite confusing for a beginner. Have a look at ETF vs ETC vs ETN to understand what options you have.
Conversely, if your goal is to generate a consistent stream of income, a distributing ETF is more suitable. It provides regular dividend payouts, akin to receiving dividends directly from individual companies. Have a look at this dividends guide and dividend investing guide to find out more.
When dealing with distributing ETFs and aiming to reinvest dividends, you may incur transaction costs, which are absent in accumulating ETFs. The latter automatically reinvests dividends without any additional charges. Choosing one of the best ETF brokers is key to keeping your costs as low as possible.
It’s important to understand that you will have to pay income tax for dividends received from your funds (or stocks). This depends on your income tax bracket and other considerations applicable to your unique tax situation.
Opting for accumulating ETFs offers the advantage of deferring the tax payment on dividends. This allows for continued capital growth, taking advantage of compound interest until the moment shares are sold.
Availability of ETFs
It’s worth noting that not all ETFs will be available in both accumulating and distributing versions. Consequently, it’s essential to first determine whether you prefer an accumulating or distributing ETF, as this choice will narrow down your options and lead to selecting an ETF that aligns better with your investment goals.
Alternatives to investing in funds
Accumulating vs distributing ETFs: summary
Choosing between accumulating vs distributing ETFs depends on individual investment objectives, tax considerations, transaction costs, and the preference for compounding growth or regular income streams. By carefully weighing these factors, you can make an informed decision when choosing the type of ETF that best aligns with your financial objectives and risk tolerance.
Accumulating vs distributing ETFs FAQs
What are the main differences between accumulating and distributing ETFs?
The key difference lies in how they handle dividends – accumulating ETFs reinvest dividends automatically, allowing for potential compounding growth, while distributing ETFs periodically distribute dividends as income to investors.
Which type of ETF is more tax-efficient for investors?
Accumulating ETFs often offer tax advantages as dividends are reinvested, deferring tax payments until shares are sold, while distributing ETFs require taxation on received dividends, subject to applicable rates.
Can I switch between accumulating and distributing ETFs based on changing financial needs?
Yes, investors have the flexibility to switch between ETF types depending on evolving financial goals – from seeking capital growth to generating regular income – but it’s essential to consider transaction costs and potential tax implications before making changes.