“Don’t look for the needle in the haystack. Just buy the haystack!” — John Bogle
Why do I choose distributing ETFs instead of accumulating ETFs? As a regular reader of this blog, you notice that I opt for distributing ETFs such as VWRD and IGLO instead of VWRA and IGLA.
VWRD and VWRA are the exact same funds. Both of these funds are listed in the London stock market and track the same index.
VWRD is FTSE All-World UCITS ETF distributing fund whereas VWRA is the equivalence and accumulating in nature.
iShares Global Govt Bond UCITS ETF, IGLO is a distributing bonds ETFs and IGLA is its equivalence but accumulating in nature.
For VWRD investors, you get quarterly dividends paid into your brokerage account whereas VWRA reinvests the dividend into the fund.
The underlying holdings of both funds are the same. Therefore, the return of VWRA and VWRD are exactly the same.
General Rule of Thumb
As a general rule of thumb, if you are at your wealth-accumulating stage, choose accumulating fund instead of distributing fund.
The reason is quite simple, you want to maximize and grow your wealth as fast as possible, therefore you should use all the dividends to buy more units instead of spending it. Distributing fund is good for retirees because VWRD gives me passive income ( dividends) quarterly.
Besides this, if you have only USD 20,000 invested in VWRD and at current rate of 1.5% payout, you only get USD75 per quarter. You cannot even buy one share of VWRD with USD75.
By choosing VWRA, the dividend will be reinvested automatically at the fund level and you save the transaction cost and headache of reinvesting the dividends received.
My advice to you, if you have small amount in your portfolio ( less than USD200k) and you are in your wealth-accumulating stage, choose an accumulating fund!
Then why do I choose distributing fund?
Then why do I choose distributing fund instead of accumulating fund? The reason is simple, I hope to survive on my dividend income without selling any of my holdings.
It sounds impossible but I think I can do it with just 1.5% of dividend yield. In the FIRE ( financial independent, retire early ) community, we believe strongly the 4% retirement rule. VWRD and VUSD have a dividend yield of about 1.2-1.5%, if I can get other sources of income to top up another 2.5% per year, I basically do not need to sell any unit of my ETFs after retirement.
Therefore, the purpose of me choosing a distributing fund rather than an accumulating fund is to save my headache of selling my holdings after retirement.
My other investments such as SGD-denominated REITS and bank stocks and MYR-denominated EPF shall provide the extra 2.5% I need during retirement.
In some countries, investors do not have to pay taxes on dividends that they do not receive. For investors in these countries, holding accumulating ETFs can provide a usable tax advantage over distributing ones.
You shouldn’t do what I do
If you in wealth-accumulation stage, buy accumulating funds. Accumulating fund might be a better choice if your country of residence requires you to pay tax on dividends.
By investing in an accumulating fund, the dividends received will be reinvested automatically. This save you headache and transaction cost in long run.
The only problem you have will be selling your ETFs according to your asset allocation after retirement. Whether market timing is important while selling your holdings during retirement is another topic of discussion. For me, since I am holding distributing funds, I just use my dividend to fund my retirement lifestyle.
Conclusion
The choice is yours. If you think of switching from accumulating ETFs to distributing ETFs after retirement, you may trigger a huge capital gain tax. Do your home work and decide which one you prefer before you start your ETFs investing journey.
In countries that do not tax dividends but tax capital gains, distributing ETFs might be preferable. On the other hand, in countries that tax dividends but not capital gains, accumulating ETFs might be preferable. Investors need to analyse their own local tax situation carefully to make best use of the choice of share classes.
Whether it is a distributing or an accumulating fund, it is a good choice if you opt to invest in ETFs. And trust me, you will beat 80-90% of actively managed funds in Malaysia and Singapore.
Happy investing.
1. iShares Global Govt Bond UCITS ETF, IGLO is an accumulating bonds ETFs and IGLA is its equivalence but accumulating in nature
I think you mean IGLO is a distributing ETF?
2. Given that these are Ireland domicile ETFs, there’s a 15% withholding tax. Is this taken into account when the fund distributes the dividends?
3. If there will be the hassle of selling come retirement and potential capital tax gains, then might it be better to purchase distributing funds instead even if the person is in the wealth accumulating stage and both distributing and accumulating give out the same return either way? Thoughts for the Malaysian?
4. If the accumulating fund reinvests the dividends, then wouldn’t the total amount in an individual’s fund be more then if they were investing in distributing ETFs, given that the accumulating fund is compounding upon dividends earned?
5. What are your thoughts re dividend stocks?
Thank you!
Dear Claudia,
Thanks for your questions,
1) You are right and I have made necessary changes. IGLO is a distributing bonds ETFs.
2) Yes, 15% tax is imposed on the dividends, you get your dividends after 15% deduction.
3) Actually it is not difficult to sell your ETFs after retirement, I still believe it is better for you to opt for accumulating funds during wealth-accumulation stage.
4) So theoretically you have to reinvest your dividends once you receive them in distributing fund to match the returns of the equivalent accumulating fund. However, due to transaction cost ( you need to pay brokerage fee every time you buy your ETFs) so in real life, I think your returns as a distributing fund investor might be slightly lower than those accumulating fund investors. Having said that, if you can time the market ( although I don’t think anyone can do this) and use the dividends to buy on dips, your returns might be better than those holding accumulating funds.
5) I was a strong dividend stocks believer and that was the reason I bought a lot of Singapore REITS and bank stocks, but how much dividend amount in future from a company is something you can’t control. And sometimes buying stocks based on dividend yield might be a value trap, I can tell you my experiences on those companies such as Lippo mall trust, First Reit, HSBC, Westpac etc and the list goes on. So my advice to you, go for ETFs in long run.
Pingback: Dividend from ETFs-Getting better Now - Dr Goh-FIRE & Life Journey!
Hi, thanks for sharing.
I am Malaysian, just want to check with you, upon selling.. says after invested /accumulated ETF for 20 years i decided to sell all , transferring back to Malaysia will require us paying tax? is there going to be any issue (transferring large amount back to Malaysia bank account) if the amount says above 1 mil? just thinking long terms.. if i have 1 mil of Investment one day in ETD 🙂
Dear ST,
Actually I have no definite answer for you. The future is unpredictable. Foreign sourced income should not be taxed at this moment. If you remember well, our government made a U turn last year scrapping off the initial plan of imposing 3% tax of all remittance of foreign income back to Malaysia.
I think the better way will be taking back ( withdrawing) 4% of your total investment every year.
Cheers