new Boglehead trying to understand accumulating vs distributing ETFs

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sherzing
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Joined: Mon Apr 10, 2017 1:01 am

new Boglehead trying to understand accumulating vs distributing ETFs

Post by sherzing »

Hello,

I'm new to investing and try to get my head around accumulating vs distributing ETFs, but I struggle to understand if it fits my needs. My long term plan would be to live the distribution of the investment rather then selling it in around 20-30 years. My current strategy is to save and invest every 3 month to keep the brokerage fee and the account fee to a minimum with TD international.

I'm German living in Dubai where are no capital gain taxes as long as I live here, but in the future when I would change the country I will most likely have to pay taxes.

So far, I've been investing in VWRD as I thought it would be good to start and it was a common recommendation for a lazy portfolio. With this, every 3 month dividend is paid out, but the dividends have a 15% tax. As I invest every 3 month, I can ignore the broker fee for reinvesting, as I would incur it anyway.

From my understanding, a distributing EFT has a fairly constant value and the gains are distributed. With this, I could just continue to buy more of the same ETF, would get more shares and over time more dividends paid by it. My assumption here is that the price of the ETF will be roughly constant.

Now I wonder, if I would invest in an accumulating ETF like IWDA, I would not have to pay the 15% taxes on the paid out dividends, but as the ETF itself gains value, it would be more expensive to buy over time. My train of thought is that I buy now for price X, but in 3 month I would have to pay the value of X plus the reinvested dividend (and more over time). Is this basic thought correct, or is the increased price not important when it's seen over a longer period of time?

I wonder if it would be better to take constant value and reinvest the dividend, or if it has a higher yield to take the accumulating one over the long term.

Thanks for your help.

Best
Sven
AlohaJoe
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Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: new Boglehead trying to understand accumulating vs distributing ETFs

Post by AlohaJoe »

sherzing wrote:From my understanding, a distributing EFT has a fairly constant value
No, this isn't correct. It is also pretty easy to check just by looking at any price chart of a distributing ETF over time :happy . Go look at the price of VWRD today and then look at it 3 years ago. It moves around a lot, right?
Now I wonder, if I would invest in an accumulating ETF like IWDA, I would not have to pay the 15% taxes on the paid out dividends, but as the ETF itself gains value, it would be more expensive to buy over time.
Why would the price matter? You spend $500 today and you spend $500 tomorrow. You bought $1,000 of IWDA. It doesn't matter whether the price is $2/share or $3/share. You have $1,000 worth of IWDA.

You are a bit loose with the word "gains". There are two kinds of "gains" for any equity ETF: capital gains and dividends. Both accumulating and distributing ETFs will change their price constantly (and usually by a large amount) due to capital gains (and capital losses). The only difference is what they do with dividends.

The only reason to choose one over the other is because of taxes.
Topic Author
sherzing
Posts: 2
Joined: Mon Apr 10, 2017 1:01 am

Re: new Boglehead trying to understand accumulating vs distributing ETFs

Post by sherzing »

Thanks for the clarification.

I know that I didn't specify the word gains much, as I think over the time of 20 years, in the end it wouldn't really matter if it's capital gains or dividends as long as my current situation holds true that I don't have to pay capital gains tax here. I try to look at the total increased value over time.
Neus
Posts: 496
Joined: Fri Sep 22, 2017 2:12 am
Location: a Developing country in Asia with Low Cost of Living and Tax Treaty with USA

Re: new Boglehead trying to understand accumulating vs distributing ETFs

Post by Neus »

AlohaJoe wrote: Wed Apr 12, 2017 5:23 am
sherzing wrote:From my understanding, a distributing EFT has a fairly constant value
No, this isn't correct. It is also pretty easy to check just by looking at any price chart of a distributing ETF over time :happy . Go look at the price of VWRD today and then look at it 3 years ago. It moves around a lot, right?
Now I wonder, if I would invest in an accumulating ETF like IWDA, I would not have to pay the 15% taxes on the paid out dividends, but as the ETF itself gains value, it would be more expensive to buy over time.
Why would the price matter? You spend $500 today and you spend $500 tomorrow. You bought $1,000 of IWDA. It doesn't matter whether the price is $2/share or $3/share. You have $1,000 worth of IWDA.

You are a bit loose with the word "gains". There are two kinds of "gains" for any equity ETF: capital gains and dividends. Both accumulating and distributing ETFs will change their price constantly (and usually by a large amount) due to capital gains (and capital losses). The only difference is what they do with dividends.

The only reason to choose one over the other is because of taxes.
AlohaJoe,

Please help me understand, does accumulating ETF is tax more advantageous than Distributing ETF by avoiding L3TW? (While L1TW and L2TW is unavoidable)

Note: In my case in Indonesia, L3TW on dividend is taxed at income tax bracket, about 25-30% but any tax withholding overseas can be deducted, so if accumulating ETF is indeed works that way it enables me to avoid 10-15% in tax, it will be huge difference
Remember Rule 5: Never try to time the market. Two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
AlohaJoe
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Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: new Boglehead trying to understand accumulating vs distributing ETFs

Post by AlohaJoe »

Neus wrote: Sun Mar 04, 2018 9:23 pm Please help me understand, does accumulating ETF is tax more advantageous than Distributing ETF by avoiding L3TW? (While L1TW and L2TW is unavoidable)
I have no idea what L1TW, L2TW, or L2TW are so I can't help, sorry. :(
Kalergie
Posts: 45
Joined: Mon Sep 16, 2013 8:19 am
Location: Europe

Re: new Boglehead trying to understand accumulating vs distributing ETFs

Post by Kalergie »

AlohaJoe wrote: Sun Mar 04, 2018 9:35 pm
Neus wrote: Sun Mar 04, 2018 9:23 pm Please help me understand, does accumulating ETF is tax more advantageous than Distributing ETF by avoiding L3TW? (While L1TW and L2TW is unavoidable)
I have no idea what L1TW, L2TW, or L2TW are so I can't help, sorry. :(
My understanding is:
L1TW refers to the withholding tax on income generated by a security which is held by the fund in the origin country
L2TW refers to the witholding tax from the country where the fund is domiciled
L3TW refers to the tax due in the country where you are liable for your income taxes

For example, holding VXUS and living in Dubai.
L1TW (say Toyota, so what ever the withholding tax might be from Japan)
L2TW (VXUS is domiciled in the US, so US withholding tax which varies between 10%-30%)
L3TW (Dubai does not currently tax income)

I hope I didn't mix anything up.

I just wanted to add that depending on the country you live in, it doesn't matter if the Fund is accumulating or distributing. Technically you earn income and in most countries you have to pay taxes on that. Just not in Dubai. As was pointed out, L1TW and L2TW cannot be avoided.
Another point worth mentioning for Germans who live in Germany: Apparently, you should best only invest in funds which are listed in the Bundesanzeiger. The reason for this is that the Finanzamt (the German IRS) requires to have all data of the fund which includes dividends (accumulating or distributing) reported by the fund provider in the Bundesanzeiger. By the way, VWRD is reporting to the Bundesanzeiger so it's fine.
If it is not reported in the Bundesanzeiger, the Finanzamt has no way of telling reliably how much income a fund generated. And as a German you may know what happens if the Finanzamt has to "guess" your income. ;)
https://www.bundesanzeiger.de/ebanzwww/ ... 16f4d7fcef
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