Today we’ll go into more detail regarding the differences between distributing or accumulating ETFs as a European investor. Deciding between the two options is not as easy as you may think.
I know there’s just something special about receiving regular payments in the form of dividends from your investments in stocks or distributing ETFs. Even I get a bit excited whenever one of my ETFs pays me dividends. After all, dividends are one of the oldest and easiest forms of earning passive income from your money.
Nonetheless, I moved my own ETF investment strategy more and more towards accumulating ETFs since the beginning of 2021, as I believe they have some advantages over the long run. That being said, the decision is not as easy as you may think and there are many things you need to consider.
Since everyone is different, you might come to a different conclusion for yourself, which is perfectly fine. My goal with this post is to help you with that.
Distributing vs. Accumulating ETFs
In case you’re new, you’re probably wondering what Distributing or Accumulating means in the first place.
In short, distributing ETFs pay out the dividends they receive from the companies in the index to you via distributions, while accumulating ETFs reinvest the dividends they receive, by buying more shares of the companies in the index.
|Distributing ETFs 💸||Accumulating ETFs 💰|
|✓ Receiving dividends can be motivating||✓ More tax-efficient, capital stays invested longer|
|✓ Regular cashflow without selling||✓ No work needed to reinvest dividends|
|⨉ Taxes on dividends||⨉ If the market is down, are you more likely to sell?|
|⨉ Work needed to reinvest dividends||⨉ No cashflow, unless you sell shares (eg. retirement)|
Of course when it comes to taxes I can only generalize, so check your local tax laws to make sure.
Now you might think that the choice is pretty straight forward, but it’s actually not that simple.
A Story Of Two Investors
Let me tell you a story of two investors, to give you a better perspective on which strategy might be better for you.
Let’s imagine it’s 2022. The stock market crashed and is now down 30%. Two investors hold the same ETF in their portfolio, the Vanguard FTSE All-World.
Investor 1 chose the distributing version, while investor 2 chose the accumulating version.
Investor 1 sees dividends being paid out to his account on a quarterly basis, on average about 2% per year of the amount he invested. This motivates him to stay invested, as he sees that his investment is still generating cashflow.
He sees the dividends as extra income, which he uses to pay for occasional restaurant dinners with his wife. While he’s not happy to see his ETF in negative territory, he accepts that he can’t time the market. He keeps investing on a monthly basis as he had planned, since he wants to increase future quarterly dividend payments.
Investor 2 chose the accumulating version of the same ETF, where dividends are reinvested automatically into more shares of the companies within the index.
As a result, his ETF is only down 28% instead of 30%. Still, it doesn’t feel like much of a difference to him and he doesn’t feel good about his investment. He chose this version because some guy on YouTube called “Angelo” told him that it’s more tax-efficient to go with an accumulating ETFs.
When he started investing the year before, he was sure that he wouldn’t have any problems holding on to his investment strategy when the market is down, which sadly is now the case. But, since that’s always easier said than done, he starts wondering if he made the right decision.
That same day, he reads a news headline saying that the market is still overvalued! In fear of losing more he pulls the trigger and sells his entire investment at a loss.
You can probably imagine how this story ends.
A year later the market fully recovered.
Investor 1 is happy that he held on to his long-term strategy, which includes monthly investments into the ETF. Because he kept adding to his investments while the market was down, he was able to get more shares at a discount and his portfolio has grown significantly.
Meanwhile, investor 2 is angry at himself for having sold his investment at the worst possible time and is wondering if he should get back into the market.
This is something that happens to many new investors. Investing is always easy when things are going well and it’s a lot harder when it feels like the world is about to collapse. Which is actually more often than you may think.
My ETF Investment Strategy
My wife and I switched to the accumulating Vanguard FTSE All-World ETF in the beginning of 2021. Via a single, low-cost ETF, we’re able to invest into over 3.600 companies from all over the world.
Since we’re not planning on spending dividends we receive anytime soon, we figured it would be easier and a bit more tax-efficient to keep buying the accumulating version long-term.
That being said, seeing regular dividend payments could potentially be what keeps you motivated to stick to your investment strategy, even if you end up paying a bit more on taxes over your investment career compared to an investor with an accumulating ETF.
Ultimately, you know yourself best, so choose whichever strategy you’re more likely to stick to.
Degiro Promotion Until September 30th (Up to 50€!)
In case you’re still looking for a low-cost broker to buy ETFs, Degiro currently has a summer reimbursement campaign, running from July 21st until September 30th, 2021!
DEGIRO will refund transaction fees of up to 50€ for new clients who activate their account using my link during the offer period.
Also, make sure you check out the extensive commission-free ETF list on Degiro, which now includes both the accumulating and the distributing versions of the Vanguard FTSE All-World ETF:
If you’re based in Austria or Germany, where taxation is a bit more complicated, your best option is going with a local broker, as they take care of everything for you. These are my favorites.
Alright, I hope I was able to make your investment journey a bit easier with this post. I would love to know in the comments below if you prefer accumulating or distributing ETFs.
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- Our 111.000€ ETF Portfolio
- The Best Brokers for European Investors in 2021 (ETFs & Stocks)
- Robocash Review: How Did I Miss This One?
- Finding The Best ETFs in 2021 (European Investor)
- Viainvest Review – 15 Months Later (2021)
- How To Buy ETFs – My Investment Strategy
- PeerBerry Review – Worth It In 2021? (My Personal Opinion)
Distributing vs. Accumulating ETFs – The Video
- My Investment Tools
A list containing all my investments in P2P Lending, the brokerage accounts I use to buy ETFs, my speculative investments in Bitcoin and my free bank accounts. It even includes the tools I use for blogging and YouTube.
- P2P Bonus Offers
A collection of all the best, currently available bonus and cashback offers in the P2P lending space. Regularly updated.
Disclaimer: Investing involves risks of losses. You should always do your own research before investing into anything. Also, some of the links are affiliate links, which help support me, the website & YouTube channel. I only link to services I use myself, none of them are sponsored.