I recently bought into my first etf that is accumulating and not distributing. And I was curious about this, Does it give you a notification with details like it does when you are paid dividends on a stock? Thanks
@Raz You do get notified when a stock pays out dividends & you receive them, however, that’s not exactly the case with accumulating ETFs. Since they reinvest the amount, you don’t receive any proceeds, thus you’re not notified when the fund allocates the cash.
@Raz @David For an accumulating ETF the reinvested dividend amount, which is called “excess of reported income”, can be found in the Literature section of an ETF provider. For example, iShares SWDA has a taxable dividend deemed paid at 31/12 each year. This is roughly the same amount of income that the distributing version of the ETF distributes, if a distributing version exists. See page
and spreadsheet provided there:
All providers of accumulatung ETFs are required by law to report this information for both investors and tax authorities to use.
The reason is simple. If there were not this reporting regime then people could use accumulating ETFs to implement tax avoidance schemes.
Thus the takeaway message is that we are not notified, but if we hold an accumulating ETF in a taxable account then we have the responsibility to look this up ourselves. Personally, I find this a nuisance, but there we are. It adds a few minutes each year to my tax return preparation work. Alternatively, I can avoid it by making sure I never own a share of an ETF on the date of its excess income distribution, eg 31/12 in the case of SWDA.
To make things more difficult, even distributing ETFs, like VUSA, have “excess of reported income” in addition to their distributed dividends, meaning that these may have 4 quarterly amounts to report for tax, plus the 1 additional excess amount that was not distributed, so 5 amounts in total to account for on my tax return. So the problem of needing to look up on the iShares website, or other provider, cannot be avoided by owning only distributing ETFs.
No broker I know of helps clients by reporting to them the amount of the undistributed income. We are on our own to find it from the ETF providers’ websites.
All this hassle is avoided of course if you hold the ETF in an ISA. Maybe that is the case for you. I hope my answer at least helps you know how to find the cash value of the dividend reinvested in your accumulating ETF.
Fortunately I am using the T212 ISA. SWDA is also the ETF Im invested in so your answer is very convenient. So If I understand correctly - on the 31/12 of each year I would receive additional shares or fractions of a share as my dividend is re-invested into the fund. And this will automatically compound my returns. And because Im using an ISA I dont have to worry about tax but If I ever invested outside of an ISA I would have to. Thanks for the response
You do not receive any extra shares. The reinvested income is just reflected in the share price of SWDA. Your number of SWDA shares does not change.
That explains why the price of the accumulating version of an ETF always exceeds that of the distributing version (if there is one), even though they may have been launched at the same price on the same date.
The largest holding in SWDA is Microsoft. Today the fund is worth $20.88 billion and owns MSFT shares worth $696 million. The dividends that SWDA receives day of day on its holdings in all 1,704 companies are continually being reinvested (after tax deductions) in more shares of these 1,704 companies. So your shares in SWDA tend to represent more and more ownership of MSFT as the years go by.
Today a share of IWDA is $48.66. MSFT is $164.85. So each share of SWDA (same as IWDA) contains 0.032*48.66/164.85 = 0.0094 shares MSFT.
Oh I see, Thank you for explaining. I think I misunderstood an explanation I was given by someone previously - or perhaps they didn’t fully understand it. Would you advise investing a fixed amount monthly into a distributing ETF and investing all dividends I receive back into it. Or investing a fixed amount monthly into an accumulating ETF, or perhaps both?
Up to you. There are pro and cons. I use both types.
Accumulating: you don’t have to remember to reinvest the dividends; the dividends are actually reinvested more efficiently, as that happens continuously rather than just 4 times a year.
Distributing: you can use the dividends to rebalance your portfolio, by investing them in some different investments than the one generating the dividends.
Tax reporting hassle if held outside an ISA: similar
It is worth looking at other aspects such as OCF, AUM, spread and liquidity. For example, ISF (distributing) is a larger fund than CUKX (accumulating), even though they are both iShares FTSE 100 trackers. The former has 9 times greater AUM (assets under management) and so is more frequently traded and usually has smaller bid/ask spread. Both have OCF of 0.07%, but according to hl.co.uk indicative spreads are 0.07% and 0.31% respectively.
Yh Ive been on justetf.com/uk a lot looking through all the different options and comparing multiple ETF’s. I’ll continue to do my research until Im at the point where Im not asking stupid questions on forums lol. Thanks mate you have been a big help.