ETF Accumulating or Distributing – Which one is better?
Perhaps you are in the process of building up a portfolio of ETFs. Before you can implement your portfolio, there are a few questions to answer. One of these is the question: ETF Accumulating or Distributing? In this article, you will learn what the difference is between an accumulating and a distributing ETF. We will also show you which distribution type is better suited to you, depending on your financial goals.
In brief:
- Accumulating ETFs allow you to reinvest profits.
- The power of compound interest helps you earn interest on interest and your assets over long periods of time, thus generating more returns.
- You can use dividend-paying exchange-traded funds to build up a passive fortune.
What are the differences between ETF Accumulating or Distributing?
When an investor buys a stock, they own a small part of that corporation. When it comes to stocks or ETFs, there are different advantages for investors in individual stocks. One example is a possible voting right that can be used at a general meeting to support or reject certain decisions of the group.
- At annual general meetings, for example, it is clarified whether a company pays dividends to its shareholders.
- When a company makes a profit, some companies choose to pay it out to their own shareholders in the form of dividends.
ETFs consist of numerous individual equities. There are two different ways in which exchange-traded funds can handle these profits: the accumulating or distributing form. But what exactly do these forms of investment mean and which is better?
When does an ETF accumulate?
If an exchange-traded fund has the abbreviation ‘Acc’ in its name, it is an accumulating variant. The abbreviation stands for ‘accumulating’ or ‘reinvesting’.
If you opt for an accumulating exchange-traded fund, your profits are reinvested directly in your investment. This has a particular advantage: you can take full advantage of the compound interest effect.
Attention!
The compound interest effect means that the income you have earned from interest is added to the actual capital and interest is paid on it in subsequent years. In the future, you will earn interest not only on your assets but also on the interest you have already earned. The total amount of return on investment grows faster.
This way, your assets can generate more returns because a larger total amount is available to bear interest. Especially over longer periods of time, compound interest can have a major impact.
The impact is even greater if you opt for an ETF with a high yield. This option is therefore particularly suitable if you are looking for high returns and have a long investment horizon.
Another advantage speaks in favour of the accumulating option: you do not realise any profits, so you do not have to pay tax on your profits in advance. In contrast to the distributing option, you pay less tax.
What is a distributing ETF?
You can also recognise distributing exchange-traded funds by their name. They contain the abbreviation ‘Dist’, which stands for ‘distributing’.
If your ETF is distributing, the dividends earned on your securities will be paid out to you. Depending on the exchange traded fund, there are different rules for when these payments are made – for example, monthly, quarterly or annually.
As mentioned earlier, accumulating ETFs have a tax advantage over the distributing option. Before your dividends are paid out, the respective tax due is automatically deducted by your bank or broker. The following are deducted:
- Solidarity surcharge
- Final withholding tax
- Church tax may apply
Good to know:
Remember to take advantage of the tax-free allowance. This way, you will only be taxed on the amounts that exceed the tax-free allowance.
This option can also offer some advantages. You will receive your profits at regular intervals and can use them for other purposes: for example, you can invest in other financial assets or buy something for yourself. Please note that transaction fees may apply if you decide to reinvest your profits.
Building a passive income is another attractive possibility offered by distributing ETFs, which is reminiscent of passive income from stock dividends.
Accumulating or distributing ETF – which is better?
Now that we have clarified what exactly happens to your money with the two options and where the profits actually come from, the question arises as to which variant is better for your own portfolio. To do this, let’s take a look at the advantages and disadvantages of the different types of distribution.
Advantages and disadvantages of accumulating ETFs
When it comes to the question of ‘what to invest in’, the most important advantage of accumulating exchange-traded funds comes into play: the potential for higher returns. By reinvesting your profits, you can benefit from the compounding effect. With your higher initial amount, there is more money to generate returns on.
The potential tax advantages already mentioned also favour this distribution option. In addition, there are no fees that may apply to the purchase of new fund units. If you have a distributing option and wish to reinvest dividends, there may be additional costs.
However, there are also disadvantages if you opt for this distribution method:
- Exchange Traded Funds are a long-term investment. With this type of distribution, you only realise profits after many years and have no active cash flow in the meantime.
- Regular distributions can be a motivator for some investors to continue investing money consistently.
- Psychological effect: Some investors tend to continue to pay into ETFs that are accumulating losses while selling the profitable distributing variants.
Advantages and disadvantages of the distributing option
The key advantage of distributing exchange-traded funds is that you receive regular income payments into your securities account. You can use this income however you like.
For example, you have the option of building up a passive income. If you use the saver’s allowance, you can receive a certain amount of winnings tax-free and plan for other purchases. In addition, regular payouts are a motivator for some investors to continue investing consistently.
Even with the distributing option, you have to reckon with negative aspects:
- Corporate dividend payments are voluntary. If a company makes less profit, it has the option of cancelling dividend payments for the year in question. If you plan on regular income, this can lead to potential financial risks.
- Compared to accumulating exchange-traded funds, you will earn a comparatively lower return with the distributing option. Since you are tapping profits from the actual assets, you have a smaller amount that will earn interest in the future.
ETFs and taxes
You may be looking for an ETF for beginners or a top ETF and are therefore also looking into the topic of taxes. It is important to know that accumulating and distributing ETFs differ in terms of tax.
If you own an exchange-traded fund that reinvests profits, you will pay tax when it is sold at a profit:
- For this purpose, the difference between the acquisition cost and the sales revenue is calculated.
- At this point, the flat-rate withholding tax and church tax are applied.
- Normally, your bank will automatically deduct taxes.
In addition, there is the option of the advance lump-sum. You can see this tax as a down payment on the tax just described. It is levied on the increase in the value of your exchange-traded funds. Here, too, you do not have to take any action yourself.
Good to know:
You can benefit from a distributing ETF for tax purposes if you take advantage of the saver’s allowance. However, you have to take action yourself here: you can set up what is known as an exemption order at your bank.
- As an individual, you can receive 1,000 euros in tax-free income annually if you have set up an exemption order.
- The amount of €2,000 applies to couples.
- If you exceed these yields, the flat-rate withholding tax applies.
- For exchange-traded funds, the partial exemption of 30 per cent applies, which further increases the total of tax-free amounts.
You can also benefit from the saver’s allowance if you own a reinvesting exchange-traded fund. This is due to the aforementioned advance lump-sum, which acts as an advance on later profits. This measure is particularly effective in times of higher interest rates.
One complicated way to benefit from tax-free gains is to sell parts of your accumulating exchange-traded fund. However, you should keep in mind that there may be additional sales charges that can reduce your overall return.
Conclusion: accumulating vs. distributing – the right distribution type for your ETF
To summarise, there is no single correct distribution type for your exchange-traded funds. Depending on your financial goals, your personality and your priorities, one or the other variant is better suited for your wealth accumulation.
If you are looking to build up a passive income or simply benefit from regular returns, you could use the distributing option. This way, you can plan additional profits for further expenses, invest your dividends in other financial investments or use the money for other purposes.
If your goal is to maximise your returns, you should opt for an accumulating exchange-traded fund. Exploit the compound interest effect to make your money work harder for you. Your dividends will be reinvested to generate further returns for you.
From a tax point of view, you should make sure to set up an exemption order with your bank and to benefit from tax-free profits of up to €1,000 for individuals. You can find more information on the topics ‘How safe are ETFs?’ or ‘Water ETF’ here.
FAQ – Frequently asked questions about accumulating ETFs
