Distributing or Accumulating ETFs?

What happens to dividends in ETFs?

Companies can share their profits with shareholders by distributing dividends. Shareholders receive a certain amount of money based on the number of shares they own.

An ETF consists of thousands of individual stocks. When a company pays dividends to an ETF, these dividends belong to the ETF investors. An ETF can handle these earnings in two ways:

• Distributing ETFs: The ETF pays out the dividends to its investors. Depending on the ETF, investors receive payments annually, quarterly, or even monthly.
• Accumulating ETFs: The ETF reinvests the dividends by purchasing more shares. This increases the fund’s total assets (fund volume). This process is known as accumulation (thesaurierung).

Distributing ETFs: Dividends Paid to Your Account

Distributing ETFs regularly pay out their earnings directly to your settlement account. -> You have full control over how to use this money—you can either reinvest it or spend it elsewhere. If you choose to reinvest the dividends, transaction costs may apply.

For investors using German brokers, taxes on earnings from distributing ETFs are automatically deducted, making the process convenient. However, if your broker is based abroad, you must report these distributions in your tax return.

Because of their regular payouts, distributing ETFs are ideal for generating passive income.

• You can treat these payments like a salary from employment.
• They are especially popular among older investors, who often use them as a form of retirement income.

Accumulating ETFs: Dividends Are Reinvested

The key advantage of accumulating ETFs is that you, as an investor, benefit from the compound interest effect.

• Earnings, such as interest and dividends, are automatically reinvested into the ETF.
• As the ETF’s value grows, so does the value of your ETF shares. This means you also earn returns on the reinvested dividends, allowing your money to work for you and generate long-term returns.
• The longer your money remains in a profitable accumulating ETF, the greater the compound growth effect.

Since you do not receive cash payouts from accumulating ETFs, you do not immediately realize taxable gains. The overall tax burden during the accumulation phase remains significantly lower compared to distributing ETFs, as taxation is initially minimized.

A Simplified example (with considering tax) to compare distributing and accumulating ETF:

Which is better?

• If you want to build wealth, an accumulating ETF is the better choice. Over the years, you benefit from compound interest, which can significantly boost your returns. Additionally, you save on transaction costs that might occur if you manually reinvest dividends.
• If you want passive income, a distributing ETF is more suitable. You receive regular cash flow, but to generate enough income to live on, you need to invest a large amount.
  • With a distributing ETF, you can also make better use of the €1,000 annual tax-free allowance, as you receive dividends directly.

Accumulating vs. Distributing ETFs

Reference

• Ausschüttende oder thesaurierende ETFs?