Difference in accumulating ETFs and distributing ETFs

Have you ever seen an exchange-traded fund (ETF) with ‘ACC’ or ‘DIST’ at the end of its name? If it says ‘ACC’, it means that it is an accumulating ETF, and if it says ‘DIST’, it means that it is a distributing ETF. But what exactly are accumulating ETFs and distributing ETFs? Keep reading to learn more about these types of financial products.

What is an ETF?

Before going more in-depth about the difference between these two ETFs, it is important to understand what an ETF is. An ETF is a product that follows an index, commodity, bond or composition of products. You can think of it as a basket of securities.

Unlike some other funds, ETFs are bought and sold on a stock exchange. The performance of an ETF follows the price movements of the underlying products in the fund. For example, an ETF that tracks the S&P 500 will be composed of fractions of shares of companies within this index. Since there are many underlying assets within one single product, ETFs enable you to easily diversify your portfolio at an affordable price.

Are you new to investing or want to learn more? Then, read this article about investing in ETFs.

What is an accumulating ETF?

An accumulating ETF is a type of ETF in which any dividends that are paid out by its underlying holdings within the ETF are reinvested into the fund by the fund manager at no extra expense. As a result, the value of the ETF increases.

How does an accumulating ETF work?

To better understand exactly how an accumulating ETF works, we work through an example. But first, it is important to understand Net Value (NV) and Net Asset Value (NAV). NV is the total value, and NAV is the NV divided by the number of shares issued.

Consider the following:

• An ETF has an NV of €500,000
• There are 20,000 shares outstanding, making the NAV €25
• The ETF is made up of
  • 600 shares of Company A worth €500 per share
  • 2,000 shares of Company B worth €100 per share
  • €0 in cash
• You bought €5,000 worth of ETF shares, which is 200 shares

Say Company A issues a dividend of €2 per share. Since the ETF has 600 shares of Company A, it now has €1,200 in cash thanks to the dividend, bringing the NV to €501,200 and the NAV to €25.06. The value of your portfolio is now €5,012 (€25.06*200 shares).

The compounding effect comes into play when the fund manager uses the €1,200 in cash to purchase new shares. When another round of dividends is issued, this will bring the NV, NAV and your portfolio value up even further, without you having to do anything.

What is a distributing ETF?

In contrast to accumulating ETFs, distributing ETFs pay out dividends to investors. This means that you receive cash flow and can use the money received however you choose.

What is the difference between accumulating ETFs and distributing ETFs?

For comparison, we use the same example from above, however the dividend is paid out to you instead of being reinvested by the fund manager. In this case, you still have a portfolio value of €5,012, but you have €5,000 worth of ETF shares and €12 in cash.

In both scenarios in this example, whether it is an accumulating or distributing ETF, the portfolio value was €5,012 in the end. However, if you do not reinvest the dividend of the distributing ETF, then you will not achieve the compounding effect. If you buy more shares of a distributing ETF with the dividend paid out, it would be similar to the outcome of the accumulating ETF, not taking into account any additional fees involved (i.e., transaction costs).

Choosing whether to invest in accumulating or distributing ETFs should be in line with your investment plan. For example, if you want your investments to grow over time without actively managing them, you may choose an accumulating ETF, whereas if you want steady passive income, you may choose a distributing ETF. It is also wise to consider the tax implications involved, as these may differ from country to country and may vary depending on the type of ETF.

What are the risks involved with accumulating and distributing ETFs?

Accumulating ETFs have many advantages, but, like any investment, it is not without risk. We recommend only investing in financial products that match your knowledge and experience. Also note that dividends are never guaranteed. Companies can choose to suspend, reduce or eliminate dividend payments.

Can I invest in accumulating and distributing ETFs with DEGIRO?

At DEGIRO, we make it easy and affordable to invest in accumulating and distributing ETFs. We even have a number of accumulating and distributing ETFs in our Core Selection of ETFs. Some examples are:

• iShares Core S&P 500 UCITS ETF USD (Acc) – IE00B5BMR087 – Xetra
• iShares MSCI China A UCITS ETF USD (Acc) – IE00BQT3WG13 – Xetra
• iShares S&P 500 Inf Tech Sector UCITS ETF USD (Acc) – IE00B3WJKG14 – Xetra
• iShares Gold Producers UCITS ETF USD (Acc) – IE00B6R52036 – Xetra
• iSharesOil&Gas Exploration&Prod UCITS ETF USD (Acc) – IE00B6R51Z18 – Xetra
• Lyxor New Energy UCITS ETF Dist – FR0010524777 – Xetra
• Lyxor World Water UCITS ETF - Dist – FR0010527275 – Xetra
• iShares High Yield Corp Bond UCITS ETF EUR (Dist) – IE00B66F4759 – Xetra
• Invesco S&P 500 High Div Low Vol UCITS ETF Dist – IE00BWTN6Y99 – Xetra
• iShares Global Water UCITS ETF USD (Dist) – IE00B1TXK627 – Xetra

Please check the following page for details on the conditions and the complete list of commission-free ETFs.

The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.