Accumulation fund "dividends"

[swill453]

If you have the accumulation version of an ETF, VWRP for example, does its value increase incrementally as it gets dividends from its constituent shares, or does it have quarterly jumps around the time the non-accumulation version pays out a dividend?

(I assumed the former, but thought I'd just check.)

Scott.

[Alaric]

If you have the accumulation version of an ETF, VWRP for example, does its value increase incrementally as it gets dividends from its constituent shares, or does it have quarterly jumps around the time the non-accumulation version pays out a dividend?
.

I would expect neither. The price of both versions will reflect the market prices of the stocks in the matching index. These may or may not increase smoothly, most probably not because of market noises. When the ex dividend point arises, I would expect the price of the Income version to drop by the dividend distribution whilst the Accumulation version sails on.

But if it's supposed to track an index, perhaps it's necessary to look at how the index construction handles dividend accrual and reinvestment issues.

[NotSure]

In my albeit limited experience, it's value will simply follow the total return of the index/stocks/assets it tracks (minus a tad in OCR). So certainly no quarterly 'jumps' (these would be broadly cancelled by the ex divi drop in capital either way).

[mc2fool]

If you have the accumulation version of an ETF, VWRP for example, does its value increase incrementally as it gets dividends from its constituent shares, or does it have quarterly jumps around the time the non-accumulation version pays out a dividend?
.

I would expect neither. The price of both versions will reflect the market prices of the stocks in the matching index. These may or may not increase smoothly, most probably not because of market noises. When the ex dividend point arises, I would expect the price of the Income version to drop by the dividend distribution whilst the Accumulation version sails on.

But if it's supposed to track an index, perhaps it's necessary to look at how the index construction handles dividend accrual and reinvestment issues.

In my albeit limited experience, it's value will simply follow the total return of the index/stocks/assets it tracks (minus a tad in OCR). So certainly no quarterly 'jumps' (these would be broadly cancelled by the ex divi drop in capital either way).

I'm not sure either answer is correct -- although I'm not sure what the correct answer is.

If the ETF is tracking a capital only index (say the FTSE 100) then the value of the index will reflect the market prices of the stocks, which will, of course, themselves be affected by ex-dividend dates, etc, but the index itself ignores the value of dividends paid out. The ETF OTOH cumulates the dividends until the next payout date. So, the question becomes, does the price of the ETF include the value of the cumulated dividends?

Common sense would say yes, but then that means that the ETF must drift away from the index (upwards) until the next ex-div date, 'cos the index doesn't include dividends, let alone cumulated ones ... but, I've never heard of ETFs' tracking error increasing up to the ex-div date so ... hmmm, dunno...

Total return indices have their own practical problem for trackers in that, the FTSE series ones at least, "reinvest" dividends on the companies' ex-dividend dates. However, ETFs can't do that 'cos they don't receive the dividends until some weeks later. FTSE acknowledge this but carry on regardless:

"Although in reality there is a timing delay between the xd date and the receipt of dividends (payment date), it is considered preferable to assume all income is reinvested on the xd date rather than incur the complications of allowing a time lag before reinvestment of the declared dividends."
https://research.ftserussell.com/products/downloads/FTSE_UK_Index_Series_Guide_to_Calc.pdf

[NotSure]

Common sense would say yes, but then that means that the ETF must drift away from the index (upwards) until the next ex-div date, 'cos the index doesn't include dividends, let alone cumulated ones ... but, I've never heard of ETFs' tracking error increasing up to the ex-div date so ... hmmm, dunno...

If you hold an accumulating tracker that doesn't beat the dividend paying version, then swap it quick!

Indexes don't have ex-dvi dates, and dividend paying ETFs are smoothed by the fact they hold dozens to thousands of shares.

[monabri]

How does an accumulating ETF work?

https://www.degiro.co.uk/knowledge/inve ... 0increases.

Or...

https://indexfundinvestor.eu/2020/12/21 ... ally-work/

[mc2fool]

Common sense would say yes, but then that means that the ETF must drift away from the index (upwards) until the next ex-div date, 'cos the index doesn't include dividends, let alone cumulated ones ... but, I've never heard of ETFs' tracking error increasing up to the ex-div date so ... hmmm, dunno...

If you hold an accumulating tracker that doesn't beat the dividend paying version, then swap it quick!

Indexes don't have ex-dvi dates, and dividend paying ETFs are smoothed by the fact they hold dozens to thousands of shares.

1st sentence: indeed, but I wasn't talking about acc vs inc ETFs (which is an additional complication) but inc ETFs vs their index.

2nd sentence: indeed indices don't have ex-dvi dates but it's the index that is "smoothed" by the fact that it holds lots of shares. ETFs OTOH do have ex-div dates, and Monabri's 2nd link confirms what I'd never thought of, that an inc ETF's tracking error must increase up to its ex-div date and be "reset" on it.

"Dividends affect the ETF’s net value. The ETF’s net value/NAV increases when the underlying companies distribute dividends to the ETF. The ETF’s net value/NAV decreases when the ETF distributes dividends to its investors."

Now, the acc complication is that, firstly to answer the OP, yes, the acc units value increases incrementally as it gets dividends from its constituent shares, but as the expectation is that acc and inc units should have the same total return, that implies that the ETF must cumulate dividends received in both cases and reinvest them for the acc units on the same day as it pays them out (or goes ex-dividend maybe) for the inc units.

As such that means that neither acc nor inc units will have the same total return as the index, as they both reinvest/payout on different dates to the index. At least under FTSE methodology.

[tjh290633]

If you have the accumulation version of an ETF, VWRP for example, does its value increase incrementally as it gets dividends from its constituent shares, or does it have quarterly jumps around the time the non-accumulation version pays out a dividend?

(I assumed the former, but thought I'd just check.)

Scott.

Both income and accumulation versions increase their value as dividends roll in. One the day that the income units go ex-dividend, their unit value falls by the amount of the dividend but the accumulation unit does not change.

Your thought is correct but the wrong way round. It is the income unit that falls, not the accumulatin unit that jumps.

TJH

[1nvest]

In a general (taxable) account, when holding a accumulation ETF you should be looking up the dividend value and declaring that on your self assessment as a dividend, as though you'd actually been paid it. And increase the cost base of the purchase price by the dividend amount.

For instance if you bought at 100p price, has risen to 120p, but 5p of that was accumulated dividends, then you declare that 5p dividend to HMRC and for capital gains taxation purposes you set your purchase price to 105p.

Accumulation funds typically set a specific 'dividend' date, such as end of calendar year, when they declare the entire years accumulated dividends for the purpose of tax reporting. Also look for 'Excess Reportable Income' in the funds documents. Monevator has a article here https://monevator.com/excess-reportable-income/

I believe, not sure, but if you buy/sell mid-year then you also need to proportion the dividend according to the percentage of the year that you held the fund.

It can become 'too-much' to manage such that often the advice is to only hold accumulation funds within tax exempt accounts (such as ISA's), or otherwise risk a miscalculation and having HMRC performing a investigation, a ordeal that having gone through myself can be very trying (mine occurred some years back when it was outsourced by HMRC and the too-and-fro of information requests were IMO unreasonable and often not even related, I think they were under remit to hit x prosecutions/year targets and seemed to strive to get to such via any means. In come cases I received a letter stating a response within 20 days of the letter date was required but where the actual letter was received 17 days after the letter date such that you had to drop everything to dig out the information and get the return letter into the post the same day as having received the letter).