As with many investment funds, some exchange traded funds (ETFs) generate income. However, different ETFs treat this income in different ways. Some pay the income directly to investors as cash, in the form of dividends or interest. Others automatically reinvest the income into the ETF’s underlying investments. Here’s what you need to know about accumulating vs distributing ETFs.
Both types of ETF may earn investors income, in the form of dividends or interest, with one key difference.
Read on to learn more about differences between accumulating and distributing ETFs, including how they work and pros and cons of each of them.
The income you earn, in the form of dividends from shares or interest from bonds, is paid directly to you.
The income will be paid at regular intervals – typically quarterly or half-yearly – either directly into a linked bank account or, in some cases, as a cheque. The amount of income will depend on how much money you have invested and how well the companies held within your ETF have performed.
You could manually reinvest this income in the ETF, invest or save it elsewhere, or use it to top up your other sources of income, from a salary or pension, for example. If you choose to reinvest it, you may incur trading fees that you may not have incurred had you opted for an accumulating ETF.
As highlighted above, with accumulating ETFs any dividends or interest are used to buy more assets in the ETF on your behalf. This can result in the value of your ETF growing without you having to reinvest. Not only do you benefit from the direct increase of the amount of the dividend or interest, but it will also mean you benefit from the effect of compounding. This is where future earnings are based on a higher baseline value, boosting the future income that your ETF can earn (and reinvest).
You can find out more about compounding in our full guide to dividend ETFs.
Potentially, yes. Unless you hold your ETF within the tax-efficient wrapper of a stocks and shares ISA or a personal pension, investment dividends may be liable for tax. The tax you may pay is known, unsurprisingly, as dividend tax. It applies whether or not the dividends are paid out. This means that even if your dividends are reinvested within an accumulating ETF, they are still subject to dividend tax.
The amount of dividend tax you pay depends on your income tax band. However, dividends are taxed at lower rates than income from wages and pensions. Basic-rate taxpayers, for example, pay dividend tax of 8.75%. And, in the 2023-24 tax year, you have a dividend tax-free allowance of £1,000 per year before you have to pay dividend tax at all. From April 2024, this allowance goes down to £500.
The frequency of ETF dividend payments can vary. There are no official rules dictating how often dividends should be paid. Quarterly or half-yearly is the most common, but you may also find ETFs that pay dividends annually or, occasionally, monthly.
Whether an ETF is accumulating or distributing doesn’t in and of itself affect how often dividends (or interest, where applicable) are paid. Just as the frequency of direct dividend payments can vary with a distribution ETF, so can the frequency of reinvestment of dividends or interest for accumulation ETFs. This would typically be quarterly or half-yearly, but could also be monthly, annually, or at another interval.
If you want to check out the top-performing accumulating and distributing ETFs, take a look at the list below. Just keep in mind that these aren’t necessarily the best ETFs to buy today. Past performance doesn’t dictate future results, so the under-performers may do well over the next few years.
| Icon | Fund | 1-year performance | YTD performance (to 2 April 2024) | Link to invest |
|---|---|---|---|---|
 | Global X Blockchain UCITS ETF USD Accumulating (BKCG) | 135.17% | 12.99% | Invest with InvestEngineCapital at risk |
 | WisdomTree Blockchain UCITS ETF USD Acc (BKCN) | 107.73% | 20.17% | Invest with Hargreaves LansdownCapital at risk |
 | iShares Blockchain Technology UCITS ETF USD (Acc) (BLKC) | 94.99% | 10.09% | Capital at risk |
 | Amundi MSCI Semiconductors ESG Screened UCITS ETF Acc (SEMG) | 76.78% | 34.32% | Invest with InvestEngineCapital at risk |
| Invesco CoinShares Global Blockchain UCITS ETF Acc (BCHS) | 63.37% | 21.75% | Invest with BestInvestCapital at risk |
| Icon | Fund | Dividend yield | 1-year performance (to 2 April 2024) | Link to invest |
|---|---|---|---|---|
| iShares MSCI World Information Technology Sector ESG UCITS ETF USD (Dist) (WITS) | 0.58% | 48.97% | Invest with iiCapital at risk |
| Global X Uranium UCITS ETF USD Distributing (URND) | 0.84% | 48.52% | Capital at risk |
| Global X U.S. Infrastructure Development UCITS ETF USD Distributing (PAVG) | 0.65% | 38.71% | Invest with Hargreaves LansdownCapital at risk |
| iShares Listed Private Equity UCITS ETF USD (Dist) (IPRV) | 4.26% | 38.13% | Invest with XTBCapital at risk |
 | Invesco Nasdaq-100 Swap UCITS ETF Dist (EQQD) | 1.02% | 36.50% | Capital at risk |
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
You know what I’m going to say, don’t you? Yep…it depends! And, mostly, it depends on your personal circumstances and goals.
Long story short, if you’re earning enough from other sources that you don’t need the income, and your investment strategy is to grow your assets to help you achieve future goals, then an accumulating ETF is probably best for you.
If, on the other hand, you’re investing at least in part to supplement your other income, and long-term growth is less crucial, then consider a distributing ETF instead.
And, of course, if your investment strategy falls somewhere in between, there’s nothing stopping you having both types of ETF in your portfolio.
One of the most popular ETFs in the UK is the Vanguard S&P 500 ETF. However, investors sometimes get confused because there are 2 versions:
The funds will hold the same selection of US stocks and the ongoing charge (OCF) for both ETFs is the same, 0.07%. So, when weighing up the Vanguard S&P 500 accumulating ETF (VUAG) vs S&P 500 distributing ETF (VUSA), the key thing to consider is whether or not you want dividends reinvested automatically.
Typically, if you’re in a wealth-building stage, it makes sense to use the Vanguard S&P 500 ETF acc. vs the Vanguard S&P 500 ETF dist. – because automatically reinvesting dividends can help compound your growth. Whereas, if you’re at the stage where you’re drawing income from your portfolio, the distribution ETF might make more sense.
The other key thing to think about is tax. If using the accumulating Vanguard S&P 500 fund, you only need to worry about tax when selling your holdings. But if you’re using the distributing Vanguard S&P 500 ETF, any dividends paid will count towards your tax-free dividend allowance for that year (which is only £500 for the 2024/25 tax year), and you’ll need to pay tax on anything over this.
One way to simplify things is to hold your Vanguard S&P 500 ETF in a stocks and shares ISA. That way, it doesn’t matter whether you use the accumulating or distributing version because you don’t have to pay any UK capital gains or dividend tax for investments held in an ISA.
Distributing ETFs pay out any dividends or interest earned directly to investors, whereas accumulating ETFs automatically reinvest any income into the underlying assets. Both have advantages and disadvantages, and the right type for you will depend on your circumstances and investment goals. Use the information in this guide to help decide which type is best for you or, if in doubt, speak to a professional financial adviser.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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