Disclaimer this isn’t a financial advice. The purpose on the article is only to share my experience and thoughts which can only be appropriate to my investment strategy. Remember to study or to consult an authorized financial advisor.
Introduction
If you talk about ETF there is always a choice to make and it’s how to about use future dividends. That’s what I had to face few times ago to create my portfolio.
There are two categories of ETF : distributing an accumulating. In the first case it grant a return on our investment as dividend, in the second one the profit will automatically reinvested in the ETF. Obviously it doesn’t influence the performance of an ETF, because it tracks an index, however it can influence the return on the investment, and that’s how this happen.
Case study
Let’s take f those ETFs, which track the S&P 500:
- iShares Core S&P 500 UCITS ETF (Acc)
- iShares Core S&P 500 UCITS ETF USD (Dist)
Both of them have a TER of 0,07%, which is the annual cost of managing the ETF, and assume to invest 1000$ on each one. I will refer to the first one as “Acc.” and the second as “Dist.” from this point on.
The chart shows an identical behavior for both ETFs, but the Acc. grow a little more after a couple of years, that’s related to dividends policy.
Infact on one hand Dist. gives an 1.2% average dividend each year, which is payed quote owner, on the other one the Acc. reinvest dividends automatically.
As a result after 5 years the values will be:
- Acc 2061,68 $.
- Dist 1913,35 $ and 65,4 dividends.
At this point the question is legit, Why aren’t they the same?Let’s find out.
On 1000$ the dividends is 1,2% per year, so it is 12$, however on it there is the capital gain tax, which is 27%, Therefore the 12$ become 8,76$. If it want to be compounded a commission to the broker should be payed, and an average one is 3–4$. Therefore our 12$ now is 5,76$. In the end if we apply this to our profit every year that’s what define the spread between Acc and Dist . In addition as the time lapse grow the impact of capital gain tax and commission will grow exponentially.
Conclusion
In view of the facts I opted for an accumulating ETF for my portfolio, not because one is better than the other, but because I planned a long-term investment(10+ years) and my portfolio won’t be afflicted by commissions and capital gain taxes. In the future I will convert my ETF in a distribution one, that’s why I want an income to spent during my late years. Infact as everything in the finance every asset, even the ETFs have a different purposes base on the investor use case.
