Accumulating vs distributing ETFs: which for Belgians?

What are ETFs?

An ETF (or exchange-traded fund) is a collection of tens, hundreds, or sometimes thousands of stocks or bonds. Investing in ETFs is a lot easier than buying stocks that you have to analyse one by one.

There are a few reasons why ETFs are a sound investment:

• Diversification at the core: diversification is one of the core tenets of good investing. Through ETFs, you can expose yourself to thousands of companies through just a handful of funds.
• Built for the long-term: investing in ETFs compounds to substantial returns over the long-term and has shown to beat stock picking time and time again. A "simple" globally diversified index like MSCI World has delivered an average annual return of 10.8% since 1979!
• Simple to get started: index investing through ETFs is one of the easiest way to start investing.
• Cheap: with the lack of active management costs, ETFs are a particularly cheap way to invest your savings.
• Tax-advantageous: due to the lack of taxes on profits from stocks in Belgium 🇧🇪, ETFs are a great way to invest without giving away too much of your gains to the taxman.

But let's get into our topic: the difference between a distributing and accumulating ETF.

What's a distributing ETF?

Companies share their profits with shareholders through the payout of dividends. For instance, each quarter a company like Microsoft distributes a dividend to everyone who owns shares in Microsoft. The dividend is per share, so you earn a higher total dividend the more shares you own.

An ETF that invests in hundreds of stocks receives all these dividends. And if you own that ETF, you are entitled to your share of the dividends. Likewise, bond ETFs receive interest payouts from the underlying bonds.

A distributing ETF will pay out these dividends in cash to you, usually every quarter. You can recognise a distributing ETF as it usually has "Dist" or "Distributing" in its name. Alternatively, you can use a website like justETF to find out if a fund is distributing. There are even ETFs that focus on dividend-paying stocks, the so-called dividend ETFs.

What's an accumulating ETF?

An accumulating ETF directly reinvests the dividends into the fund for you. This means that the value of an accumulating ETF will increase faster than its distributing counterpart. So even though you don't get a dividend payout in cash, you still benefit from the dividends.

You recognise an accumulating ETF by "Acc" or "Accumulating" in their name.

Accumulating vs distributing ETF: which one to choose?

Distributing funds have a 30% dividend tax

Belgium has a 30% tax on dividends. The tax is applicable to individual stocks but also to distributing ETFs! However, accumulating ETFs are exempt from the tax because the dividends are reinvested before they ever reach your bank account. This is the main reason why Belgian investors should favour accumulating funds over distributing funds.

Accumulating funds have a higher return

Investment returns are also better with accumulating ETFs as the money is reinvested automatically for you. You bypass the dividend tax, but also any other fees or taxes you would incur if you were to reinvest the dividends yourself.

The higher returns of accumulating funds are clearly visible in the animation below. It shows the returns over the last 5 years of a distributing and accumulating version of an ETF. The line of the accumulating fund is clearly higher than that of the distributing fund. You can try it out yourself on the justETF website.

Accumulating funds are more in line with a passive approach

You don’t have to worry on how to reinvest the dividends, the fund does it for you. This saves you time, and prevents succumbing to the temptation of trying to time the market with the dividend payouts. By automatically reinvesting the dividends, compounding can really work its magic. This strategy may be unsexy, but we are convinced that good investing is boring!

Young people are better off with accumulating funds

It makes even more sense for young people to invest in accumulating funds. After all, you're likely still in the phase of your life where you're growing your wealth. With accumulating funds, you won't worry about reinvesting the dividends as it's done for you and you can optimally benefit from the effect of compound interest.

Read more on how to build the optimal portfolio of accumulating ETFs.

Some accumulating funds have a higher transaction tax

The Belgian authorities charge a different rate for the transaction tax (also known as the "TOB") for distributing funds than for accumulating funds. It mostly affects funds that are registered in Belgium.

When the fund or one of its compartments is registered in Belgium, the TOB rate is:

• Distributing fund: 0.12% at purchase and 0.12% at sale
• Accumulating fund: 1.32% at purchase and 1.32% at sale

When the fund or one of its compartments is not registered in Belgium, the TOB rate is:

• Distributing fund: 0.12% at purchase and 0.12% at sale
• Accumulating fund: 0.12% at purchase and 0.12% at sale

So when investing in accumulating funds, prefer ETFs that aren't registered in Belgium. For funds that are registered in Belgium, it's sometimes possible to find an equivalent index or ETF that is not, and for which you'll pay a TOB rate of 0.12%. Note that the rules around the Belgian transaction tax are complicated, so complex even that brokers charge a different rate for the same ETF!

Conclusion: we prefer accumulating funds

Unless you have a good reason not to, we suggest buying only accumulating funds, if only because you won't be taxed on the dividends.

Curvo: an easier way

Choosing between an accumulating or distributing ETF is one of the many questions you should answer when starting to invest. You have to figure out which indexes should be in your investment portfolio, which ETFs to buy, when to buy, understand the tax implications of your decisions, rebalance your investments and make sure they stay in line with your goals and risk tolerance. We built Curvo to take away all these complexities of investing and turn it into a simple process, accessible to anyone.

We understand that it's hard to build the portfolio that's right for you, so creating an account starts with answering a questionnaire on your investment goals and your appetite for risk. You’ll then be assigned the best portfolio of index funds that matches your goals and risk tolerance. Each portfolio is managed by NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM). The portfolios are globally diversified, invest in over 7,500 companies, and are tax-optimised for Belgians.

When investing through the Curvo app, you get the following benefits:

• Invest in a portfolio tailored to you: based on a questionnaire, the right mix of funds is selected for you that corresponds to your goals and appetite for risk.
• Safety: your investments are managed by NNEK, a Dutch investment firm that is overseen by the Dutch regulator (AFM).
• Set up an automated savings plan: put your savings on autopilot. Choose an amount and it will automatically be invested every single month.
• Tax-optimised: each portfolio consists of accumulating index funds of stocks and bonds and is tax-optimised for Belgians. This way, as we showed above, no dividend tax has to be paid. Also, the funds were chosen so that they're exempt from the Belgian stock transaction tax.
• All your money is invested: in contrast with other providers, your investments work with fractional shares. This means that all your money is put to work. There will never be cash sitting on your account doing nothing.
• No entry or exit fees: there are no transaction fees, entry or withdrawal fees.

Our mission is to improve the financial well-being of our generation by making good investing accessible to all. Learn more about how Curvo works.

Summary

We explained the difference between distributing and accumulating ETFs. We also discussed the advantages of accumulating funds in terms of taxation, less maintenance, and overall better in line with a buy-and-hold strategy. If you want your investments to grow over the long term without spending much time managing them, it's definitely worthwhile to stick to accumulating ETFs.

Choosing between an accumulating and distributing ETF is one of the many questions you have to decide on when starting to invest. There's definitely a learning curve associated with managing your own portfolio of ETFs through a broker. We showed how Curvo takes away all these complexities and makes good investing easy and accessible to all. Feel free to take a closer look at how Curvo improves the financial well-being of our generation.

Questions you may have

How does an ETF pay dividends?

Let's say you have an distributing ETF where the dividend yield of the fund is 2%. This means that at a share price of €100, you receive €2 in dividends each quarter for each share of that distributing ETF that you own. In Belgium, you have to pay a 30% in tax on the dividend, leaving you with €1.40. Depending on your broker, the broker will withhold and declare it for you, or else shift the burden to you.

Note that dividends are never guaranteed. Companies can increase and lower them at will, or even remove them entirely.

What are the best accumulating ETFs?

There's a variety of them to choose from. Here's a selection of our favourite ones:

• VWCE
• IWDA
• EMIM
• SXR8
• CNDX

These are included in our list of best ETF for Belgians.