Decoding Accumulation ETFs: Making Complex Investment Terms Easy with AI Legalese Decoder
- May 11, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Understanding Accumulation ETFs
Hi everyone, a few months ago I started investing in VUAG, an accumulation ETF. My understanding at that time was that while Accumulation ETFs grow faster, dividend ones stay around the same price but you are being paid a ‘salary’ in a way.
One aspect that I am struggling to comprehend is how Accumulation ETFs reinvest the dividend that you were supposed to get and how that specifically benefits you as an investor. Yes, the price of the ETF goes up, but is it artificially manipulated by the ETF owners or are shareholders given shares equivalent to the price of the dividend received?
## Comparison with Dividend ETFs
For example, VUSA is the dividend version of VUAG, paying 1.5 GBP per share. It seems to have almost the same growth as VUAG, leading me to believe that many investors are reinvesting the dividend and acquiring shares for the price of the dividend. However, this process must be manual. On the other hand, does VUAG (an accumulation ETF) automatically allocate shares equivalent to the dividend received? Based on the current price of 77 GBP, this would amount to approximately 0.019 shares for each 1 share held.
Using the AI Legalese Decoder can help shed light on these complex investment strategies, offering explanations in simpler terms and aiding in making informed decisions regarding portfolio adjustments.
## Making Informed Investment Decisions
Despite looking at various Reddit posts and the Vanguard website, the information provided only mentions reinvesting dividends back into the ETF. To determine if it is truly beneficial to opt for accumulation over distribution ETFs, a deeper understanding of how the process works is required. By gaining knowledge through resources like the AI Legalese Decoder, one can make informed decisions rather than simply following generic advice found on platforms like YouTube.
Considering that I am investing in my ISA (a tax-free account), the argument for accumulation ETFs being more tax-efficient does not apply. Therefore, it is essential to understand the mechanism behind accumulation ETFs to make the most suitable investment choices.
## Conclusion and Future Strategy
Thanks to everyone who has taken the time to address my queries and provide valuable insights. With the newfound understanding, I have decided to stick with ACC for now and allocate a portion of my investments to distribution ETFs for diversification purposes. I plan to maintain a strategy of 75% ACC and 25% Distribution, reinvesting dividends in my ISA account. This approach aligns with my long-term investment goals and ensures tax efficiency.
Once again, thank you to everyone for their support and guidance. Have a fantastic day ahead! 💖
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****** just grabbed a
Can you explain the level of financial knowledge you have as an eight year old? I am more used to explaining to someone like they are five.
Imagine you have the simplest ETF in the world, with one company, let’s say Toyota.
Let’s remember how companies work. In this case Toyota sells cars for a profit. At the end of the year the Toyota board can use this profit to build more factories or they can reward the shareholders for their loyalty with a dividend. The shareholders should be happy either way. The new factory will build more cars which will lead to higher future profits (and a higher future dividend). The dividend now will add confidence and encourage other investors to buy shares and keep the share price high.
Let’s say a Toyota share is worth £100 in January 2023 and in 2023 each share makes £5 of profit of which £2 is distributed as dividends and £3 is reinvested into new factories.
To make the numbers nice this is the equivalent of the company being worth £100 million in 2023 with £5 million profit in 2023, of which £2 million is dividend distributions and £3 million is reinvested.
If you had bought a share in Jan 2023 you would have a share worth £103 and a cash dividend of £2 in Jan 2024. You can reinvest that £2 if you like.
Let’s say an ETF manager sets up a Toyota only ETF. They offer ACC or DIS versions. Alice and Davina buy £100 of the ACC and DIS ETFs respectively in Jan 2023. In both cases the ETF manager buys a share of Toyota.
Alice’s ETF in Jan 2024 has a £103 share and £2 cash. The ETF manager uses the cash to buy ~
2% of a share so now Alice owns the equivalent of ~1.02 shares in Toyota. If the ETF was to dissolve and sell all their assets Alice would get £105.
Davina’s ETF in Jan 2024 has the same £103 share and £2 cash. The ETF manager distributes the £2 cash leaving Davina with the same 1.00 share in Toyota, worth £103, and £2 cash.
Notice that Alice’s ETF owns more Toyota shares than Davina’s. If Alice were to sell her ETF she should expect to get a higher price. This is why ACC ETFs grow faster than DIS ETFs.
Accumulate etfs keep the dividends and use it to buy more shares in the individual companies, this means that the fund owns more shares and as such slowly pushes the price of the ETF up. You don’t see the number of shares of the ETF going up, it’s just worth more
VUSA and re-investing the dividend yourself or automating it will get similar returns to holding VUAG. the difference being that you would have more shares of an ETF that will grow less. with VUAG you’ll have less shares of an ETF which has grown in price more because each share represents more of the underlying companies shares. there will be a very small amount of time the dividends are out of the market. for instance the last VUSA dividend went “ex” on 14Mar and got paid 27Mar so for that time the very small amount would be not invested. not a big deal though. my suggestion is to use VUAG inside tax wrappers and VUSA outside of tax wrappers as they make working out your tax liabilities easier. no need to detangle dividend and capital gains. also even in tax wrappers some might like to choose where the dividends go and not always straight back into the instrument they came from. in this case even in the tax wrappers VUSA might be preferable. and obviously if someone is retired and spending the dividends they might like VUSA instead.
Accumulation ETFs are like the owner of a bed and breakfast using the income to spruce up the rooms to charge more per night.
Income ETFs are like the owner taking the room rate as a salary and charging the same person night.
Accumulation £5 per night, reinvest the £1.50 dividend then you have £6.50 per night etc etc
Income £5 per night and take the £1.50 as salary and continue to charge £5 per night.
This is a very very simplified explanation
Hi /u/IEatTomatoes3, based on your post the following pages from our wiki may be relevant:
* https://ukpersonal.finance/investing-101/
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^(These suggestions are based on keywords, if they missed the mark please report this comment.)
My understanding is that if your investment is in an ISA there’s no real benefit to accumulating vs distributing in terms of return.
This isn’t true if you were outside of an ISA, where your distributed dividends would be taxed before they’re reinvested, which dramatically lowers your long term return.
i think you’re way overthinking this and a lot of responses here strictly speaking are not correct
both VUAG and VUSA would reinvest cash within the funds in the same way, so you don’t really need to worry about this
VUSA once a quarter pays out a dividend, so the value of the fund will drop on that day to reflect the distribution (if it was worth 100usd/share and it pays out 2usd, then the fund is now worth 98usd and you have 2 usd in cash)
VUAG will not pay out anything so it’s still worth 100 usd and you’ve received no cash
which one you should go for only depends on whether you like to receive the 2usd in cash and whether you pay tax on it.
If you’d use the 2 usd to buy more VUSA then frankly it makes no sense to choose that over VUAG.
the rest is just noise
OP we wrote an explanation of this in the wiki here: https://ukpersonal.finance/index-funds/#Acc_vs_Inc
I’d be really really interested in your feedback on whether it’s easy to understand or not.
Shares in a company pay out dividends. These are the profits that a company pays to its shareholders simply because they *own* the shares. They are the incentive for people to invest in a company in the first place. They are not profits that come from trading (buying and selling) shares.
The dividend payout of a company’s shares, as well as numerous other factors, are used by the market to determine what the current value of shares in that company should be. The basic metric used in this regard is called “price-to-earnings ratio” or “P/E ratio”. In other words, if you know that a company will pay £10 per share in dividends this year, how much would you be willing to pay in order to own a share in the company? £100? £1,000? All market participants make such a judgement and the market collectively arrives at a price for the shares. Generally speaking, when a company makes more profits, it pays higher dividends, which results in the share price increasing.
If you are just an average Joe wanting to invest your money, and don’t have a need for the dividend cash you’ll receive, then it stands to reason that you would just re-invest the dividends into that company, so that you have more shares in the company and will receive more dividends in the future.
Rather than doing this yourself, which takes time, effort, and can incur fees from the purchase of more shares, most ETFs are offered in an “income” variant (the one that pays dividends) and an “accumulation” variant (the one that effectively automatically reinvests the dividends into the same fund which paid them out).
If all you care about is your money growing, not paying you cash dividends, then the accumulation variant is the one to purchase.
To me the difference between accumulating and distributing ETFs is quite simple, one issues any dividends as cash to you, the other retains it. If you chart VUSA vs VUAG you’ll see the share price differs with VUAG being higher as it retains any cash payouts.
Investment growth makes each unit of the fund worth more. This happens the same regardless of whether it is an accumulating or distributing fund.
Dividends pay out a cash sum. Accumulating funds automatically use this to buy more units of the fund, distributing ones pass the cash on to you directly.
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