Accumulating vs distributing ETFs

Some exchange traded funds (ETFs) generate income. However, different ETFs use this income in varying ways. Typically, there are two key strategies.

The first will distribute the income and pay investors directly with cash, in the form of dividends or interest. Others automatically reinvest the income into the ETF’s underlying investments to accumulate. Here’s what you need to know about accumulating vs distributing ETFs.

What is the difference between accumulating ETFs and distributing ETFs?

Both types of ETF can generate income for investors, in the form of dividends or interest, with one key difference.

• Accumulating ETFs. These will automatically reinvest the income back into the ETF, boosting the value of your ETF both directly and through compounding over time.
• Distributing ETFs. These pay out the income directly to investors. You can choose what to do with the money.

Best accumulating and distributing ETFs

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.

• Best accumulating ETFs
• Best distributing ETFs

Table: sorted by 1-year performance based on data from JustETF.com to 6 August 2024

Fund	Icon	5-year performance (to 6 Aug. ’24)	1-year performance (to 6 Aug. ’24)	Link to invest
Amundi MSCI Semiconductors ESG Screened UCITS ETF Acc (SEMG)		197.08%	45.57%	Invest with InvestEngineCapital at risk
Amundi MSCI Turkey UCITS ETF Acc (TURL)		68.13%	37.53%	Capital at risk
Amundi MSCI India II UCITS ETF USD Acc (INRL)		91.56%	35.52%	Capital at risk
Amundi MSCI World Information Technology UCITS ETF USD Acc (TNOW)		164.52%	31.87%	Capital at risk
Amundi Euro Stoxx Banks UCITS ETF Acc (BNKE)		92.72%	30.09%	Invest with HLCapital at risk

Table: sorted by 1-year performance based on data from JustETF.com to August 2024

Fund	Icon	5-year performance (to 6 Aug. ’24)	1-year performance (to 6 Aug. ’24)	Link to invest
Amundi S&P 500 II UCITS ETF USD Dist (LSPX)		96.99%	22.67%	Capital at risk
iShares MSCI World Information Technology Sector ESG UCITS ETF USD (Dist) (WITS)		N/A%	22.42%	Invest with HLCapital at risk
Lyxor Core US Equity (DR) UCITS ETF – Dist (LCUS)		91.12%	22.33%	Invest with InvestEngineCapital at risk
iShares Edge MSCI USA Momentum Factor UCITS ETF USD (Dist) (IUMD)		52.30%	22.04%	Invest with iiCapital at risk
Amundi MSCI World II UCITS ETF Dist (WLDL)		76.56%	21.80%	Capital at risk

How does a distributing ETF work?

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 as cash into your share trading account. The amount of income will depend on how much money you have invested, how well the companies held within your ETF have performed, and how much is being paid in distributions.

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.

How often do distribution ETFs pay dividends?

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.

Pros and cons of distributing ETFs

How does an accumulating ETF work?

With accumulating ETFs, any dividends or interest are used to buy more assets in the ETF on your behalf – sometimes referred to as “roll-up”. This can result in the value of your ETF growing without you having to manually 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.

How often do accumulation ETFs reinvest?

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.

Pros and cons of accumulating ETFs

Do I pay tax on ETF dividends?

Potentially, yes. Unless you hold your ETF within the tax-efficient wrapper of a stocks and shares ISA or a personal pension, you may have to pay tax on investment dividends. The tax you may pay is known, unsurprisingly, as dividend tax. It applies whether or not the dividends are distributed or accumulated. This means that even if your dividends are reinvested within an accumulating ETF, they may still be subject to dividend tax. The amount of dividend tax you pay depends on your income tax band. You also have a tax-free dividend allowance of £500 each year.

Our expert says: What's best: accumulating or distributing ETFs?

"The right type of ETF to use is going to depend on your investing strategy and what stage you’re at. Typically, if you’re in a wealthy-building phase, it’s probably simpler and more efficient to use an accumulating ETF. Or, if you’re in retirement or using your investment portfolio as a source of income, distributing ETFs might be better because you have more control and flexibility with what you can do with the income.

However, not all ETFs have an accumulating and distributing option. So you might find an ETF that suits your strategy and you want to invest in it, but you might be forced to take whichever option is available – even if it’s not your ideal situation. Make sure you thoroughly research any ETFs to see if it’s the best fit for your portfolio. And, of course, if your investment strategy falls somewhere in between, there’s nothing stopping you having both types of ETF in your portfolio."

George Sweeney, DipFA

Deputy editor

Vanguard S&P 500 accumulation vs distribution ETF

One of the most popular ETFs in the UK is the Vanguard S&P 500 ETF, which tracks the performance of the S&P 500 index in the US. However, investors sometimes get confused because there are 2 versions:

• Vanguard S&P 500 UCITS ETF (VUAG). This is an accumulation ETF, which just means any dividends are automatically reinvested and rolled back into the fund.
• Vanguard S&P 500 UCITS ETF (VUSA). This version of the fund is a distribution ETF, which means any dividends are paid out into your account as cash.

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 your dividends reinvested automatically.

Vanguard S&P 500 acc. vs Vanguard S&P 500 dist. – which should I use?

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.

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Bottom line

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.

Frequently asked questions

• How can I tell if an ETF is accumulating or distributing?

  Often, the difference will be clear from the name. Accumulating ETFs often have ACC at the end of the name, while distributing ETFs will have DIST at the end. If they don't, or you want to be absolutely certain, read the ETF Key Investor Information Document (KIID), which should contain all the information you need to know about an ETF.

• Which distributing ETF has performed best?

  Have a look at our table of the best performing distributing ETFs available in the UK to compare. Based on 1-year performance, Invesco Nasdaq-100 Swap UCITS ETF Dist (EQQD) is the best dist ETF.

• Which accumulating ETF has performed best?

  Have a look at our table of the best performing accumulating ETFs available in the UK to compare. Based on 1-year performance, Global X Blockchain UCITS ETF USD Accumulating (BKCG) is the best acc ETF.

• What's the difference between an ETF and an index fund?

  Both ETFs (exchange traded funds) and index funds are collections of assets. Index funds will always track a stock market index, such as the FTSE 100. Some ETFs do the same, though you may also find ETFs that operate slightly differently and may include non-stock assets, such as bonds.

  Both of them will offer you good diversification and low costs. The key difference is that the 2 types of fund are traded slightly differently. ETFs are traded on stock exchanges, so their prices are "live". Index funds are bought from the fund manager (via a broker, adviser or investment platform), and shares within them are priced daily based on their current net asset value.

To make sure you get accurate and helpful information, this guide has been edited by George Sweeney, DipFA as part of our fact-checking process.

Written by

Ceri Stanaway

Writer

Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes. See full bio