Distributing Funds vs Accumulating Funds: Which is better?
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It can be challenging to choose between Distributing Funds and Accumulating Funds when you need to choose two funds. The problem is also the same when you must compare two Exchange-Traded Funds (ETFs).
An accumulating fund (or ETF) will keep the dividends and reinvest them. On the other hand, a distributing fund (or ETF) will distribute the dividends to the shareholders.
This article will discuss the details of these two options and their pros and cons. By the end of the article, you will know whether you should use accumulating or
Distributing Funds vs Accumulating Funds
Most companies pay dividends to their shareholders. If you hold shares of a company paying a dividend, you will receive cash dividends several times yearly. Since a fund holds many shares, every fund will receive dividends. Once a fund receives a dividend, it must return it to the real shareholders: you!
There are two ways for a fund or an ETF to give the dividends back to the investors:
- It can give back the money directly in cash to the shareholders. Such a fund is a Distributing Fund (or ETF), also called an Income Fund.
- Or, it can reinvest the dividends directly into the fund, increasing its value. Such a fund is an Accumulating Fund (or ETF) or a Growth Fund.
Whether you talk about mutual funds or Exchange Traded Funds (ETFs) is the same in this context. A Distributing ETF is simply a Distributing Fund traded on the stock market.
We will go over the differences between Distributing Funds and Accumulating Funds.
Taxes
Capital gains and dividends are often taxed differently depending on which country you are in.
In the United States, you will pay taxes on capital gains and dividends. They are taxed at different rates unless you hold securities for less than a year. On the other hand, in Switzerland, capital gains are not taxed for private investors. Dividends are taxed as regular income at your marginal tax rate. We start to see the difference between the two types of funds with Swiss taxes.
Taxes in Switzerland
Now, there is a myth saying that you will not pay taxes on the dividends issued by accumulating funds. This myth is entirely wrong! In Switzerland, you will pay the same amount of taxes regardless if you get the dividend or if it is reinvested directly into the fund.
In Switzerland, accumulating funds are considered to have a virtual dividend. And they will be taxed as if they distributed this virtual dividend. The Swiss Tax Authority keeps track of some ETFs in the ICTAX system. They will use this system to find out the dividends of your ETFs.
If your ETF is not on this list, you can ask them to add the ETF to the list. If your Accumulating ETF is not on the list and you do not ask to add it, your full capital gains will be taxed as income!
So, from a tax point of view, there is no advantage to either type of fund. However, it is easier in Switzerland to declare dividends rather than virtual dividends since you are sure you will not pay taxes on your capital gains.
To learn more, read my complete guide about taxes in Switzerland.
Taxes in other countries
For other countries, it depends on the tax system.
In the United States, the IRS withholds all the dividends at the source, so there is no difference. For instance, I know that in the United Kingdom, it is also easier to work with distributing funds.
On the other hand, in Belgium, it is more efficient to get an accumulating fund. Indeed, the Belgian tax office taxes dividends on distributing funds, and an accumulating fund allows them to bypass this tax. And in Germany, you will save money by having a distributing fund.
Therefore, it is essential to know your tax system. For most people, it is not an interesting subject. However, if you want to save money on taxes, you should know the details of your country’s taxes.
Tax Withholding
In many countries, tax services are withholding dividends. This is the case in the United States, where most of the world stock market value is. So, you will probably have some U.S. securities in your portfolio. If these securities are paying a dividend, the U.S. Internal Revenue Service (IRS) will withhold some of the dividends.
The IRS withholds 15% for U.S. citizens and 30% for non-U.S. citizens. There is an exception for citizens of a country with a tax treaty with the U.S. (like Switzerland). In that case, these citizens only get a 15% withholding.
Once again, there are no differences between a distributing or an accumulating fund for this case. In Switzerland, in both cases, you can declare the withholding with a DA-1 form in your tax declaration. That means the withheld money will be counted towards what you have already paid in taxes.
For Swiss securities, this is also the same. If you live in Switzerland, you likely have Swiss securities. If they pay a dividend, Swiss tax authorities will withhold 35% of the amount. But, they will not withhold dividends for the accumulating funds. You will still pay taxes on these dividends.
Transaction Fees
When you buy or sell shares of a fund in your broker, you will have to pay some fees for the transaction. For some mutual funds you directly own from your bank, it may be free to sell and buy shares.
If you have a Distributing Fund and you want to reinvest the dividends, you will have to pay some transaction fees to do it.
However, it is not as bad as it sounds. If you are in the accumulation phase, you invest almost every month. At this time, you can simply invest the dividends with the new capital. And if you are early retired, you will use the dividends anyway.
Fund Fees
The fees of a fund, its Total Expense Ratio (TER), is something fundamental when you compare two funds. Sometimes, there is a significant difference in fees between distributing and accumulating funds.
Indeed, sometimes distributing funds has higher fees than accumulating funds. This is especially true for European Funds by iShares. Many of their accumulating funds are cheaper than their distributing funds for the same index.
For instance, for the MSCI World index, iShares offers two funds in Europe:
- iShares Core MSCI World UCITS ETF (Acc) with a TER of 0.2%
- iShares MSCI World UCITS ETF (Dist) with a TER of 0.5%
The distributing fund is more than twice as expensive as the accumulating fund. It is a huge difference! Fortunately, there are better funds from other providers. However, if I had to choose between these two, I would use an accumulating fund for once.
You may not realize it, but investing fees are very important. You need to pay attention to them!
Performance
Comparing two funds that have different dividend distribution policy is complicated.
If you directly compare the performance of an accumulating fund and a distributing fund of the same index with the same fees, the accumulating performance should be better in the long run.
It is logical since the dividends are reinvested directly and compounded over time. However, this does not mean that an accumulating fund is performing any better than a distributing fund. Both types of funds have the same performance. It just means that it is more difficult to compare them.
In the case of the distributing fund, you will also have some amount of cash that you can use. Of course, if you splurge on the dividends, you will be poorer than if you had the accumulating funds. But if you reinvest them., you should have the same amount in the end.
In practice, you should be fine. Most ETF comparison platforms show you the performance as if the dividends were reinvested into the fund. For instance, this is what justetf does. It makes it possible to compare the performance of two funds with different distribution policies.
Convenience
The big practical difference between accumulating funds and distributing funds is the inconvenience.
Accumulating Funds are much lazier than Distributing Funds. You do not need to do anything with the dividends. The fund will reinvest the dividends for you.
On the other hand, if you have distributing funds, you will have to do something with the dividends that are sleeping as cash in your account. That means you will have to invest it in one of your funds.
I do not think it is too bad. At most, you will receive one dividend from your funds each month. And it is much more likely that you receive one dividend per fund per quarter since most big funds are paying dividends only each quarter.
Since you should invest every month anyway, it should not be an issue to make a slightly bigger trade. And we have already seen that for filling out the tax declaration, it is generally more convenient to have a distributing fund.
Rebalancing
When you have several funds in your portfolio, you may want to rebalance the funds periodically.
If one fund performs worse, you will need to buy more shares to bring the balance back to your target allocation. On the contrary, if one fund is performing well, you may want to stop investing in it or sell some shares until your allocation returns to normal.
Receiving dividends can give you an edge for rebalancing. Since you have extra cash, you can invest this cash based on where your allocation is out of balance. That means the dividends from your most-performing fund could be reinvested in the worst-performing one, bringing back balance. Distributed Dividends can help you rebalance!
Financial Independence
Now, we will review Distributing Funds and Accumulating Funds when FI. Whether you hold one or the other can make a tremendous difference when you reach Financial Independence.
If you are financially independent and live on your net worth, you must use your principal to cover your expenses. For example, you need 4% of your principal to cover your expenses. And we will assume you get 2% dividends from your funds. So, you can cover half of your expenses with dividends.
If you have only Accumulating Funds, you must sell 4% of your principal yearly. All your expenses will be covered by selling your funds. If you have Distributing Funds, you can cover half of your expenses by selling the funds and half of your expenses using the dividends.
With accumulating funds, you will pay more transaction fees since you will have to sell more shares. Receiving dividends from a fund is free, but selling some shares is not!
Normally, capital gains are not taxed in Switzerland. And for most ETFs, we have seen that the tax efficiency is the same since the tax office will distinguish virtual dividends from real capital gains. As such, it should not matter for retirement either whether you are getting your dividends from accumulating or distributing ETFs.
Nevertheless, I prefer the clarity that distributing ETFs offer, on top of saving on transaction fees.
FAQ
What is a distributing fund (or ETF)?
A distributing mutual fund is a fund that passes the dividends directly to the shareholders. Generally, shareholders will receive dividends every quarter.
What is an accumulating fund (or ETF)?
An accumulating fund is a fund that uses the received dividends to purchase more shares of the companies. The shareholders of the funds will never receive a dividend.
Should I prefer distributing or accumulating funds?
This depends on your country. You should prefer the funds that are the most tax-efficient. In most countries, this will be distributing funds. But in some European countries, this will be accumulating funds. In Switzerland, they are both as tax-efficient.
Conclusion
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Overall, Distributing Funds are superior to Accumulating Funds.
They will be much more useful once you are financially independent and ready to retire. You will need cash to cover your expenses. And the dividends will do exactly that. And they are generally more convenient from a tax point of view. They can also help you rebalance your portfolio more efficiently.
Contrary to some popular belief, accumulating funds are not more tax-efficient than distributing funds. You will pay the same taxes regardless of which you use. In most countries, it is easier to declare dividends for a distributing fund than for an accumulating fund.
The only advantage of an accumulating fund is the convenience it offers. However, I believe that this convenience is a bit too lazy. You would be better off investing the dividends according to your allocation rather than blindly allocating it to each fund that generates them.
For all these reasons, I believe that distributing funds are a better option than accumulating funds. When I compare index funds, I generally only consider distributing funds. Only when no good distributing fund is available for an index will I consider accumulating funds.
Now, this stands true for Switzerland. In some other countries, it will not be true. In Belgium, it is better to hold accumulating funds. On the other hand, in Germany, it is also better to hold distributing funds. And in the United States, it makes no difference. Therefore, you must know the details of your tax system if you want to save money!
To learn more about funds, read how to choose index funds and ETFs. Or, if you have already decided which fund you want, read how to buy an ETF with IB.
What about you? Which kind of fund do you prefer and why?
More reading
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How to file your taxes with Swiss and foreign securities in 2025
A step-by-step guide to file your taxes with Swiss and U.S. securities. It is really not that complicated!
How do bonds and bond funds work?
Bonds are the safety part of your portfolio, but they are more complex than stocks, so we will see how they work in detail!
Learn easy ways to optimize your finances and save thousands in Switzerland with our exclusive e-book. Learn about the most cost-effective financial services tailored for savvy residents and expats!
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Hello,
Thanks for sharing this article and providing valuable insights into accumulating and distributing investment funds.
I’m trying to understand how dividends are handled in accumulating investment funds. I know that dividends in these funds are not paid out as cash but are reinvested internally. However, I’m confused about how this reinvestment is reflected in my holdings.
I checked the yearly dividends reported for my fund on the official Swiss government website:
https://www.ictax.admin.ch/extern/fr.html#/ratelist
The fund shows non-zero dividends, which means I should be benefiting from reinvested dividends (not as cash, but as an increase in my holdings).
To investigate further, I reviewed the transaction history of my investment fund and bank account, and here’s what I observed:
– There are no dividend cash deposits (expected for an accumulating fund).
– There is no increase in the number of parts (units) I hold unless I purchase them directly from my account (unexpected, as I assumed reinvested dividends would periodically increase my holdings).
I thought the reinvested dividends might be used to buy additional units for me, but this doesn’t seem to be the case. If the dividends are being reinvested, how is this reflected? I’m a bit confused about how to track where the reinvested dividends are used, how they are reflected in the fund, and how I can see their positive impact on my investment. Could someone clarify this process?
Thanks in advance for clarifying this! Also, if there are any relevant articles or resources to help me understand this, I’d appreciate it.
Hi,
The two parts you are citing are expected. The number of parts will not grow. What will grow is the value. The fund itself will purchase new shares of the underlying companies (the fund shares themselves will not grow in number).
This is entirely transparent to the user. All the dividends stay within the fund. And the fund manager will use these dividends to buy new shares. So, your share of fund X was perhaps worth 2.98 shares before, it may be worth 2.99 shares worth, but this is all internal, you won’t see any of this.
Hi,
Thank you for your reply and for clarifying how accumulating funds handle reinvested dividends. Your explanation about the fund’s net asset value growing due to reinvested dividends, rather than an increase in the number of units, makes sense.
I have a follow-up question: Can this explanation be generalized to all accumulating investment funds, or are there exceptions where reinvested dividends might be reflected differently?
You are welcome.
I don’t think there are any exceptions, no.
Sometimes, you can take a hybrid approach. You can use a distributing ETF, but use your broker to reinvest the dividends. In that way, you will see the number of units grow and you will also see the actual dividends in your statements.
Hello Baptiste,
Thanks for the article, now I have more clarity regarding dividends for acc and dis ETFs
Does US withhold any tax for the international stocks part of VT? or any other US etf with only international stocks like vsux,vea etc?
Do you now if in Switzerland we can reclaim the international withhold tax from US domicile funds?
Thank you
KR
Constantin
Hi Constantin
Yes, there will be dividend withholding for any US ETF. And we can reclaim it entirely: Swiss Investors May Lose Access to US-Domiciled ETFs
Using the software platform for making my Swiss personal tax return, I was able to enter (as a dummy entry) some ETFs that I am considering buying. One ETF is distributing and the other is accumullating.
Entering the ISIN of the ETFs and the quantity you hold then generated the Entries for year end Value (for Wealth Tax) and also the Distributions/dividends etc that are taxable as income. (assuming you bought the at the start of the previous tax year)
Even the accumulating ETF was indicating a non zero value for the taxable value of the “non-received” distribution.
Hence I can confirm that for income tax purposes, both the distributing and accumulating ETFs are treated the same.
As an aside, I find it very useful to use the Kantonal Tax return software for planning purposes. For example, what tax is saved by making an additional pension into teh Saule 2 (BVG) or Saule 3 etc. I accept the software is always 1 year behind the current year’s planning but it is comprehensive.
Thanks for the confirmation through the tax software!
This is an excellent way of making some simulations. I also do that to estimate how much I will save with an extra contribution into the second pillar for instance.
Hi and sorry if I posted the same thing twice but don’t think the message went through.
I was just wondering if they take into consideration the value of and rental income of property outside Switzerland in the calculation of the contribution as an early retired person to AVS?
My understanding is that the tax office doesn’t include the value of property abroad (not sure about rental income though?) and I suppose – maybe too optimistically – that it would be the same system for AVS.
Thanks for any reflections on this
Hi Max
I am definitely not an expert into foreign real estate.
My guess (it’s really only that) is that the rental income would be used as the base and you would pay AVS on it and probably won’t’ have to pay AVS on wealth. But you would need an expert for this case.
Hello Baptiste,
Thank you for your effort to make easier for people in Switzerland to learn all the important information about investing in your amazing articles.
I live in Switzerland for about 3 years( I have a B residence permit).
I want to start investing long term in a portfolio 80-20 or 80-10-10.
I am thinking to invest 80% in the all world market through the US ETF (VT) that you suggested.
My question is about the taxes.
As a resident in Switzerland with a B permit, my taxes are handled automatically, meaning I don’t typically have to file tax declarations myself. However, when it comes to investing, I am wondering about taxes on dividends and capital gains. Generally, from what I know dividends from investments like ETFs are subject to withholding tax, which is often automatically deducted before you receive them. Similarly, capital gains I know that as not a professional Inverster is not taxed. But I don’t know if I have to do something so no to be in any problems with the tax authority.
Do you know anything about that?
Thank you
Theodhor
Hi Theodhor
I believe you don’t have to do anything about it. However, it’s true that if you get some Swiss shares, you will get a significant tax withholding. And you will not be able to reclaim it if you don’t fill a tax return.
However, filling a tax return does not mean you will pay a lower amount of taxes either. The same is true for the withholding on US dividends, with US ETFs.
Thank you for your quick response.
Do you believe is better not to do it for the Moment?
I am now starting, and I don’t think that I will buy for the moment any Swiss shares.
My portfolio will be 80% ETF (VT) – 10% crypto – 10% in a growth ETF
Thank you
Usually, it’s better not to do the tax return if you can avoid it because the devil you know is better than the devil you don’t know :)
Unless you can anticipate large deductions, it’s likely not worth it to do a tax return.
Once you reach 120K of gross annual income, you will be forced to do a tax return anyway. It’s often better to wait until that point.
Hi Baptiste,
Thank you very much for your time and energy putting into this blog. It is just an amazing educating materials for Swiss investors.
Once again, amazing article indeed as I haven’t considered that fact on tax changes when you suddenly might be considered as a professional trader.
Although I am thinking wouldn’t be maybe more efficient to stay with an accumulating method and transfer to a distributing method in the future when I might become a “professional trader” by definition? I can save on TER fees and do rebalancing with my active income until then.
I also assume that in accumulating method, the broker can do a currency conversions more efficiently than me in distributing method. Simply because of timing and probably having cheaper rates as institutions than retailers.
What are your thoughts on that?
Thanks!
Zuzana
Hi Zuzana
You could use accumulating funds during your accumulating phase and then switch to distributing once you reach retirement. But it would not be more efficient, both methods have the same efficiency, it’s more a matter of convenience.
Depending on the broker you use, accumulating funds may be better if it incurs currency conversion. If you can reuse the dividends in the same currency, it will not be more efficient. However, with something like Neon, where foreign dividends are automatically converted to CHF, using an accumulating fund may make more sense.
Thanks. In the meantime I got a reply saying they had added my main fund to the list! As quickly and easy as that:-)
Well done, Max!
Hello Baptiste,
Thanks for this article.
I have always invested in a Dist. fund, but I am having a doubt about switching to its Acc. version. I have two sub-accounts to my main accounts, so I receive dividends on those as well. I re-invest from my main account as the transaction fee is less expensive from the main account, so I have to transfer the excessive amount of money from the sub-accounts to the main account. It makes the process a bit tiring. Moreover, when I do the investment, there is always a portion of cash which is blocked, that cannot be invested. Can you explain me why? Is this to pay the TER? Thank you.
Hi Lizrell
Paying the TER is done inside the fund, not as an extra bill. I don’t know why there is a cash that cannot be invested. If you use fractional shares, you should be able to invest everything minus the fees. Having a little cash on the side is not a big deal though.
But yes, accumulating funds could make it easier in your case. Just keep in mind that this may mean selling more shares in retirement, which may possibly make the tax office consider you a professional investor (because there are more capital gains).
Hi Baptiste,
As I’m currently living in France l, my ETFs are accumulating dividends, meaning no tax payable as long as they are not sold.
When I move to Switzerland, I understand that only the dividend – based on the tax authority’s tool / is taxed. Does this mean that the (in this case, virtual) dividend is taxed annually or only when an ETF unit is sold?
Maybe it would be in my interest to sell all my accumulating ETFs and purchase distributing ones once I obtain Swiss residency from at least a practical point of view?
Thanks,
Max
Thanks,
Max
Hi Max
After moving to Switzerland, your (virtual) dividends will be taxed once a year when you do your tax return.
Wen you sell an ETF, you will not pay any capital gains tax.
From a practical point of view, it could make sense if you want to use the dividends but from taxes point of view, it will make no difference.
Hi,
Do you know if the Swiss tax office usually agrees to add funds and ETFs which are accumulating dividends on their list? Are there also occasions of ETFs on their lists one year which are removed the following year? I’m asking as I’m
Wondering whether I should sell by accumulating ETFs and buy distributing ones before I transfer my residence to Switzerland.
Thanks
Max
Before selling everything, you can check in advance whether your funds are available.
But from what I have heard, they are quite open to add new funds.