+++ How does an accumulating/distributing ETF work +++
(This post is aimed at those new to investing).
Good morning dear GQ community. Looking through past posts on this platform, every now and then you see questions about how ETFs work. To avoid such questions in the future, I will now explain briefly and understandably how the main ETF varieties work.
Please note: For simplicity, the calculation examples are presented in a very simplified way. Also fees and taxes are not completely and correctly included in the examples. If you notice that you still have gaps in your knowledge, please do your own research and learn more about your products. This article is only intended to provide a rough understanding.
Accumulating means that all monies (dividends) remain in the fund, and are not distributed. All money is reinvestedwhich increases the fund assets of the ETF are increased. This raises the question of when and how an ETF actually reinvests.
- How this works is explained by an example:
My fund has assets of €100 million. Main shares of my ETF are $AAPL (5%), $MSFT (3%) and $GOOG (2%). In total there are 100 stocks represented. Share certificates to investors there are €5 million. In order not to complicate things, the example will only refer to Apple. 5% Apple shares of the fund volume are 5 million € invested in the apple share. The share price is 100€, so my fund has 500,000 Apple shares. If Apple decides at the AGM to pay a dividend of 1€ on each share, my fund gets 500.000€. Less corporate income tax (15%) the remaining amount is 475.000€. Now you might think that the ETF will buy new Apple shares with this money, but be careful. It could also be that from the 475,000€ new shares of all shares included in the ETF are bought. You can check with your issuer to see how your ETF does this.
Distributing ETFs are characterized by, who would have thought it, distributions. Means. The dividends that the fund gets from the included shares are collected and paid out to the investor on certain days, bundled together.
By buying an ETF, one acquires the right to the shares it contains and their dividends. The problem is that in an ETF there are thousands of shares, and the ETF price is definitely lower than the prices of the shares added together. So, with the purchase of a distributing ETF, one acquires only a partial right. And therefore only a partial right to the dividend. The rights to payouts add up, of course, as more shares are purchased. When the ETF has received the most dividends from the included companies, a payout day is determined. When that day arrives, the issuing bank transfers the money to a central securities depository. This company has the exact customer information, and knows which broker gets how much money. Your broker, on the other hand, knows how much of the total payment is due to you.
Issuer bank -> central securities depository -> your broker -> you
#dividende
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