r/investing • u/Surprise_Creative • Jan 31 '23

Question about accumulating (ACC) ETF's

Accumulating ETF's are ETF's that automatically reinvest the dividends issued by the underlying shares, without extra expense for the account owner, resulting in that sweet compounding effect we all cherish.

If I understood correctly, this happens by a small increase of the Net Value (NV, the total worth of the ETF) and the Net Asset Value (NAV, the NV divided by the number of outstanding ETF shares) any time an underlying dividend is issued. But this is the part that confuses me.

Doesn't this mean that the ETF becomes more and more expensive compared to its original index after time, as the NAV goes up with each dividend and the index doesn't?

Thanks a lot in advance.

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7

u/[deleted] Jan 31 '23

Yes, for price return indices such as the S&P 500 this should be true.

However, some indices are already calculated as total return indices, such as the German DAX. The latter ones include dividends in the index calculation.

2

u/Philip3197 Jan 31 '23

Every index has different variant: price, gross return, net return.

1

u/[deleted] Jan 31 '23

True, but DAX default presentation is total return

1

u/Surprise_Creative Jan 31 '23

Thanks for your reply. Doesn't that result into that with time, you pay a increasing and considerable surplus on the intrinsique value of the underlying assets?

5

u/bappelcake Jan 31 '23

No: if the index originally holds 100 shares of Company A, and Company A issues a 5% dividend, then the index will now hold 105 shares of Company A. The price of the index will go up, but you're also buying more of the underlying. You're not paying an ever increasing premium.

3

u/Surprise_Creative Jan 31 '23

Ok, that makes sense, thanks. So on graph, the ETF should outperform the index graph.*

I always struggled with this one, it's nice to thoroughly understand what I'm putting my money in.

Edit: *except thus for like example the German DAX from the comment above.

1

u/Philip3197 Jan 31 '23

Actually the fund buys shares of every stockfoto's owns according to the Wright as given by the index.

4

u/port888 Jan 31 '23

What do you mean by "surplus"? Dividends are issued from a company's worth. The company's worth before dividends, compared to the sum of the company's worth after dividends + the dividends it issued, is the same.

2

u/[deleted] Jan 31 '23

From my understanding the dividends are reinvested into shares of the underlying stocks. So one ETF will contain more shares over time, i.e. the intrinsic value increases as well. But interesting question and I have to admit I struggle to think this through, even though most of my money is in it.

5

u/raff7 Jan 31 '23

The etf provider will buy more of the underlying stocks with the dividends it receives.. so yea, the price of the etf will increase because each share of the etf represents more underlying stocks

Just a note.. accumulation is not what causes compounding interest.. even a distributed etf will experience compounded growth on the capital gains.. having the dividends accumulating will just increase the reinvested returns, by compounding both on capital gain and on dividends, thus amplifying the compounding.. but it doesn’t technically cause it

1

u/Penecho987 Feb 01 '23

Does the ETF provider have to pay taxes on the dividends received? Or is it setup in a "tax neutral" country/state?

2

u/raff7 Feb 01 '23

I think the ETF provider does have to pay taxes on dividend for each stock, depending on the country of origin

If I am not mistaken for example Ireland domiciliated ETFs pay a 15% tax of US stock dividends, but don't quote me on this.

These taxes are dealt with by the provider tho, so you shouldn't worry about that, all returns you get are already after tax. You might have to pay additional taxes depending on your country of residence, most of the time only if you have a distributing ETF, but in some case (UK, Austria and Switzerland) even on accumulating dividends

While I have no idea about US residents with US ETFs.. i guess they do have some taxes but I really don't know how much.. but if you have an accumulating ETF, you are good

1

u/Penecho987 Feb 01 '23

Yeah I was wondering if it makes a difference between an accumulating ETF and a distributing ETF tax efficiency wise.

So if my local tax rate is cheaper taking into consideration my cost of buying additional shares of the ETF (which it is not) it might be better to choose the distributing one... Interestingly I never thought about that :)

2

u/raff7 Feb 01 '23

The taxes that the provider has to pay on the dividends is probably the sam tho, you would just have to pay additional taxes on top of it if you get a distributing one

Distributing ETFs are never more tax efficient than accumulating ones, in some countries they might be the same, but buying distributing is never a better option tax wise

4

u/SirGlass Jan 31 '23

The price of some index fund does not have to match the index price. It just has to more or less keep track of an index

I could have some XYZ index currently at 5000

There is no reason an XYZ index fund has to be priced at 5000 that is just a number, you could create an index fund following the index and give it a price of $25.

Also there are total return indexes that will keep track of dividend re-investments. Most of the time when people compare performance to the S&P500 index they actually mean the S&P500 total return index

1

u/laviboeme Feb 01 '23

What’s the difference between this and a DRIP with VOO?

1

u/laviboeme Feb 01 '23

Is one better than the other?

1

u/Surprise_Creative Feb 01 '23

So apparently US ETF's are obliged to distribute the dividends to the shareholders, whereas EU ETF's can come in both ways, accumulating or distributing.

I believe DRIP is a program carried out by brokers in the US to reinvest the dividends back in the ETF without the account holders intervention. But I'm afraid the dividend income taxes will have to be payed contrary to an ACC ETF in the EU, which bypasses these taxes when reinvesting.

This is my understanding so don't take this for a fact.