Will ETFs reinvest dividends for you? An increasing number of ETFs now offer ‘acc’ and ‘inc’ versions of their products
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ust as when you invest in a regular mutual fund, if you’re looking to put money in an exchange-traded fund (ETF) it’s also important to choose the right share class. An increasing number of ETFs, certainly those from big providers like iShares and Vanguard, will have either accumulating (acc) or income (inc) share classes, and the right one to pick depends on your investment objective. PICK THE RIGHT ONE ETFs with accumulating share classes will reinvest dividends back into the fund, usually at no extra expense, while income share classes will fund a dividend from the payouts the ETF has garnered from its underlying holdings (e.g. a FTSE 100 ETF paying out the money it received in dividends from the likes of Royal Dutch Shell (RDSB) or GlaxoSmithKline (GSK)). Different classes of ETF will have different tickers or EPIC codes. For example iShares Core S&P 500 (CSPX) accumulates income while the iShares Core S&P 500 (GSPX) distributes. Remember to check the share class when looking at the performance of an ETF, as the acc share class will appear like it’s performing better than the inc one, because the dividends being reinvested will
compound returns. If you’re looking for growth from your investments and don’t need an income, the acc share class is best while the inc share class is better for those seeking an income. The income share class could also be called a distributing (dist) share class, which is effectively the same thing. YOU WON’T ALWAYS HAVE A CHOICE For some ETFs you may only be able to get one or the other. For example, the popular SPDR S&P UK Dividend Aristocrats (UKDV), used by many ETF investors looking for an income, doesn’t have an acc share class. In addition a majority of bond ETFs, by design, tend not to have acc share classes as ETFs in general tend to behave like their underlying holdings. So when the coupon, i.e. the annual interest payment, is paid on a bond the ETF will distribute
the payment to its investors. On the flip side there are areas of stock market investing where dividends will be low or nonexistent so you’ll only be able to find an accumulating share class. For example a lot of technology ETFs will only have an accumulating share class because the underlying holdings will either pay a tiny dividend or none at all. Most companies in the tech sector are in growth mode so they’ll tend to funnel earnings back into the business to fund more growth, safe in the knowledge that shareholders accept it as part of the investment story. NEW PHENOMENON ETF providers offering both share classes is a relatively new phenomenon in the UK, with Vanguard last year rolling out acc share classes on most of its range. The year before, iShares 05 March 2020 | SHARES |
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