Introduction

Accumulating and distributing ETFs are two types of strategies that handle the income they generate from dividends in different ways.

Accumulating

Accumulating ETFs automatically reinvest any income generated – namely dividends – back into the strategy.

This increases the value of each share or unit of the ETF over time without distributing the gains directly to investors.

Accumulating ETFs are often preferred by those looking to compound their investments over time without receiving periodic income.

Distributing

Distributing ETFs, conversely, distribute the income they earn – which are dividends paid from the stocks that make up the fund – to investors at set intervals such as monthly or quarterly.

This provides investors with a stream of income, which can be attractive for those seeking regular earnings from their investments. 

An ETF will show if it is accumulating or distributing in the title of the ETF. For example, iShares Core S&P 500 UCITS ETF (Acc) signals that it is accumulating in the brackets while the iShares Core S&P 500 UCITS ETF USD (Dist) signals that the ETF distributes the dividends. 

Dividends paid out by the securities the ETF holds affect the ETF’s net value. The ETF’s net asset value (NAV) increases when the underlying companies re-invest dividends in the ETF. 

The ETF’s NAV decreases when the ETF distributes dividends to its investors.

Dividend income is generated when companies pay out a portion of their profits as cash. Typically, dividend yields come in at about 2% from a broad global index such as the MSCI World.

Tax implications

Tax-wise, UK investors need to pay income tax annually on dividends, regardless of whether they are distributed or accumulated, but they can subtract these out later for capital gains tax.

As a result, the long-term tax result from both distributing and accumulating funds and ETFs is identical.

In some European countries, investors do not have to pay taxes on dividends that they do not receive in their bank account. In this instance, holding accumulating ETFs could give a useful tax advantage over distributing ones.

Selecting between accumulating and distributing ETFs boils down to personal financial goals and regional tax implications. Accumulating ETFs suit long-term growth seekers by reinvesting dividends while distributing ETFs provide regular income.

Given the tax differences across countries, investors should consider their income needs and tax situation to make a choice that aligns with their investment strategy.