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Accumulating vs distributing ETFs

An efficient ETF portfolio will help you build net worth faster. There are many attributes to look at when choosing an ETF. Examples are tracking index, TER, fund size, bid-ask spread, domicile and legal aspects (e.g. UCITS). This entry focuses on yet another important consideration: the choice of accumulating vs distributing ETFs.

Accumulating vs distributing ETFs – the basics

In essence, the difference between accumulating and distributing funds lies in how they handle dividends. Distributing ETFs pay dividends to investors. Accumulating ETFs automatically reinvest dividends back into the fund.

Here’s another way to look at it. Because distributing ETFs pay out dividends, they track a price index. This could be, for example, the S&P 500 index. Accumulating ETFs track a total return (TR) index. For example, the S&P 500 Total Return index. Why are these two indices different? Because one reinvests dividends back into the fund. The other doesn’t. Over the long run (say 30 years), the effect of reinvesting dividends is huge:

This is not to say that accumulating ETFs provide higher returns. If you hold a distributing ETF, you can ride the red curve as well. You simply have to reinvest all dividends received yourself. If you fail to do so, you’re stuck with the blue line.

Accumulating vs distributing ETFs – which one is better for me?

Are you struggling with which type of ETF to choose? Here are four points you should consider.

Convenience

This seems to be a winning argument among new investors. Accumulating ETFs liberate you from the hassle of reinvesting dividends yourself. Why not using them? Putting your dividends back into the fund yourself isn’t that much of an effort. But having to do nothing at all is even better, right?

Tax implications

This is when things get interesting. Switzerland taxes your income, including dividends and coupons. However, Switzerland doesn’t tax your capital gains (unless you’re a professional trader). With an accumulating ETF, you don’t receive any dividend. Instead, you see the effect of dividends translated into capital gains. Does that mean that you’re tax free with an accumulating ETF? No.

As a Swiss investor, you don’t stop paying tax on dividends if you hold an accumulating ETF

Distributing ETFs are easy to tackle from a tax perspective. On the one hand, you explicitly receive dividends. And dividends are taxed at your marginal income tax rate. On the other hand, you benefit from capital gains. These capital gains aren’t taxes. At least not if you follow the basic rules explained here.

What about accumulating ETFs? With accumulating ETFs, dividend income and capital gains are somewhat coupled. As explained in this entry, the Swiss tax authorities have a tool call ICTax. You provide the tool with ISIN, and it spits out the taxable dividends associated to the given ISIN. For accumulating ETFs, the taxable dividends are equivalent to those of a distributing ETF in the best case scenario. In the worst case scenario (e.g. tax authorities have no data), you might end up paying more. Or at the very least having to spend time doing your own math and fighting the tax office.

In general, taxation should be equivalent for distributing and accumulating ETFs. The extra transparency of distributing ETF, however, puts you in a better spot when it comes to taxes.

Availability

Accumulating ETFs aren’t always available. For example, I don’t know of any accumulating US domiciled ETF. Because US-domiciled ETFs are more efficient than Irish- or Swiss-domiciled, I personally stick to distributing ETFs.

Fees

In general, you achieve lower fees with a distributing ETF. By lower fees I mean both TER and transaction fees. Why is this the case? Once again, because US-domiciled funds are the most cheapest. And they’re always distributing.

Non-Swiss residents

Everything said until now applies to Switzerland. Especially in terms of tax implications. If you don’t pay taxes in Switzerland, the points above might not apply to you.

In some countries (e.g. Belgium, Spain), accumulating ETFs are superior. They make it possible to avoid dividend taxes altogether. In other countries (e.g. Germany), you still pay dividend taxes on accumulating ETFs. And the process is much more cumbersome than in Switzerland.

You should do your own research. This is a good starting point.

Conclusion

Think carefully about the type of ETF you choose. Accumulating ETFs are convenient to baghold, but also have several drawbacks. If you invest in US equities (and trust this article), you should go for distributing ETFs. You’ll pay less taxes, fees and TERs. You’ll also be shielded from potential headaches when filing your taxes.

If you’re not taxed in Switzerland, tax implications might be different. In some countries, it’s superior to hold accumulating ETFs. You have to do you own research.

7 replies on “Accumulating vs distributing ETFs”

Hi Hugo, performance figures include in both cases the reinvestment of all dividends and capital gains distributions. This is regardless of whether the fund distributes or accumulates.

The benchmark includes reinvestments as well in both cases. You can verify this easily. For example, for 2017, the S&P 500 price return was +19.4%. In any of the pdfs you mention, benchmark returns for 2017 are +21.1%. The difference is the dividend yield.

Thank you. Is this a standard industry practice to report Total Return results even if they track price index? For example if ETF tracks MSCI World price index should I assume that ETF documentation will show total return results?
It is a bit confusing because in KEY INVESTOR INFORMATION document they do not mention the word “dividend” even once.

I’ve seen it often, yes, although I can’t say if it’s the standard 100% of the time. For a given ETF, the easiest way to find it out is to compare the benchmark returns in the prospectus with the index price and total returns. These are typically publicly available (a Google search should do). Hope it helps!

Hi there. Very informaticle article; thank you for that!

What if there’s no option to choose for a distributing ETF? For example, if I want to invest in Worldwide small cap stocks?

There are only two available ETF’s and both are accumulating:
https://www.justetf.com/de/etf-profile.html?query=IE00BF4RFH31&groupField=index&from=search&isin=IE00BF4RFH31#overview

The ETF is registered on the ICTax Tool though:
https://www.ictax.admin.ch/extern/en.html#/security/37986235/20191231

Would you in that regard avoid the accumulating ETF altogether and look for a different investment or make an exception here and invest into it?

Hi Investor, glad you find it helpful! 🙂 A couple of comments:

  • Personally I recommend going for a passive strategy based on broader indices (e.g. VT or VTI + VXUS) rather than for sector/cap specific (which typically involve active management), but of course this is up to you
  • If I wanted to invest in small cap only, I’d personally go for US-domiciled ETFs (reasons explained here). With that in mind, I’d invest in a combination of VSS and VB. You’ll save money on the TER, transaction fees, and dividend taxes

Hi again AverageBoy

Thanks for the very quick and comprehensive answer! I’ll check out your article about the US-domiciled ETF advantage; I’ve heard different views regarding the domicils, some say that Ireland ones are just as efficient.

My current broker (Degiro) sadly doesn’t have US-domiciled ETF’s (I’m planning to switch to Interactvie Brokers once I hit 100K).

So far I’m invested into this S&P 500 ETF (which has an incredibly low TER of 0.07%):
https://www.justetf.com/de/etf-profile.html?query=IE00B3XXRP09&groupField=index&from=search&isin=IE00B3XXRP09

I’m considering fully switching the entire fund into an All-World ETF though to diversify further:
https://www.justetf.com/de/etf-profile.html?query=IE00B3RBWM25&groupField=index&from=search&isin=IE00B3RBWM25

I was just playing with the thought of investing also into small caps to add a little “spice” into my portfolio, but I guess there’s not really a good reason to do so 🙂

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