Accumulating vs Distributing ETF

Pros and cons of accumulating ETFs

• No transaction fees or trading costs for reinvesting your dividends – this will happen automatically.
• Can be tax-efficient if investors hold their units within a Stocks and Shares ISA.

Cons of trading ETFs

• There’s no passive income from dividends as this value will be reinvested automatically.
• You would have to liquidate your units to access the value from the dividends paid.

Also consider: Investment Trust vs ETF: where should I invest?

How do you know if an ETF is an accumulating fund?

Usually, you’ll be able to identify an accumulating ETF as it will be in the name or key information of the fund. This might be the phrase “(Acc)” at the end of the fund name, or it may appear somewhere high up on the webpage of the fund.

For example, if you look at the iShares Core S&P 500 UCITS ETF on the iShares website, you can see a dropdown menu displaying that it’s an accumulating ETF. You can also directly switch to the distributing version of the fund – you can find out a bit more about this later in my guide.

Do accumulating ETFs pay Dividend Tax?

In the UK, dividend income gains are taxed regardless of whether they are paid out. As a result, your holdings in an accumulation fund may be subject to Dividend Tax.

That said, each individual has a Dividend Allowance before dividend payments become eligible for tax treatment. In the 2022/23 tax year, this stands at £2,000.

However, it’s worth noting that the Dividend Allowance is to be reduced to £1,000 in April 2023, and then down to £500 in April 2024.

Any gains in your ETF units from dividend income that exceed your Dividend Allowance could be subject to Dividend Tax, with your tax rate determined by which Income Tax band you fall into. The Dividend Tax rates in the 2022/23 tax year are:

• 8.75% for basic-rate taxpayers
• 33.75% for higher-rate taxpayers
• 39.35% for additional-rate taxpayers.

Alternatively, you could hold your ETF units in a Stocks and Shares ISA to make them tax-efficient. Investments in ISAs are entirely free from Income Tax, Capital Gains Tax (CGT), and Dividend Tax.

As a result, you wouldn’t need to worry about paying Capital Gains Tax or Dividend Tax on any value generated by your units in an accumulating fund if they are held within the ISA wrapper.

What is a distributing ETF?

A distributing ETF, on the other hand, does the opposite to an accumulating ETF – as the name suggests, distributing ETFs will distribute dividends and other income to shareholders. Again, this could be dividends from shares or interest from bonds and loans.

With the fund paying dividends to you rather than reinvesting them, this offers you a method of generating a passive income.

The downside in choosing a distributing ETF is that you’d likely incur an extra expense in the form of trading fees or commission if you subsequently decided you wanted to reinvest the value into more units in the fund.

You might also miss out on investment returns that your units could have been generating while you held the dividends in cash before using them to buy more units.

As you saw above, you may also have to pay taxes with a distributing ETF if your dividends returns exceed your Dividend Allowance, especially as your dividend gains are realised in this case.

Again, as before, you could avoid having to pay this by investing through a Stocks and Shares ISA.

Pros and cons of distributing ETFs

• You can generate a passive income, as distributing ETFs pay dividends or interest out to shareholders, rather than reinvesting it automatically.
• Can also be held in a Stocks and Shares ISA, meaning you won’t have to pay Dividend Tax.

Cons of trading ETNs

• Dividends will not be automatically reinvested, meaning you won’t benefit from compound growth.
• You may incur more trading or commission fees if you decide you want to reinvest the interest or dividend paid out to you.

What is the difference between accumulating and distributing funds?

With accumulating funds and distributing funds, the clue is very much in the names: the former keeps dividends and reinvests them to accumulate value, whereas the latter looks to distribute returns to investors, whether that’s dividends or interest from bonds and cash.

Accumulating ETFs tend to be preferable for investors looking to generate returns over longer periods, whereas distributing ETFs are often more suitable if you’re seeking a steady cash flow from your investment.

Of course, nothing stops you from owning both in your portfolio, giving you exposure to both kinds and allowing you to make the most of the benefits that each has to offer.

Interestingly, some funds will actually have both an accumulating and distributing version, meaning they are essentially the same ETF with the same stocks and underlying holdings but with a different method of handling dividends.

For example, if you look at the same fund we discussed before, the iShares Core S&P 500 UCITS ETF, you’ll see that you can choose between the accumulation or distribution version of the fund.

That means you can achieve the same exposure to the S&P 500 with these funds while choosing whether any dividends paid or interest payments are reinvested in more assets, or paid out to you directly.

Is Vanguard’s VTI fund accumulating or distributing?

The Vanguard VTI (or “Total Stock Market”) ETF is very much a distribution fund, as it pays dividends on a quarterly basis.

You can read more about the Vanguard VTI fund on the Vanguard website.

Two funds that are examples of accumulating funds are:

• iShares Core S&P 500 UCITS ETF USD (Acc)
• iShares MSCI China A UCITS ETF USD (Acc)

Meanwhile, two ETFs that are distributing funds are:

• Lyxor New Energy UCITS ETF Dist
• Invesco S&P 500 High Div Low Vol UCITS ETF Dist

Also consider: My Best-Performing Vanguard ETFs to Buy UK guide

Accumulating vs distributing ETFs FAQs

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.