Are accumulating or distributing ETFs better for taxable investments and TFSAs?
Although both may track the same index, their mechanics lead to different practical outcomes.
by Gareth Collier - Firecrest · MoneywebI’m fortunate to save money at the end of most months, which I aim to invest in a few simple, well-diversified and tax-efficient vehicles.
As part of this strategy, I’m investing in a globally diversified exchange-traded fund (ETF), CoreShares Total World (JSE: GLOBAL), which is a distributing ETF.
Satrix recently launched the All Country World Index (ACWI) ETF (JSE: STXACW), which is quite similar in strategy, but an accumulating ETF.
Regarding taxation – dividend tax, and capital gains tax (CGT) on disposal – filing complexity and other considerations, is there any benefit in prioritising an accumulating or distributing ETF for (i) normal, taxable discretionary investments, and (ii) tax-free savings accounts (TFSAs)?
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The choice between accumulating and distributing ETFs is more nuanced than a simple preference for income or growth, particularly when considering the tax environment.
As investors, our focus should remain on maximising net returns, and the mechanics of these two ETF types can have a surprisingly large impact.
Accumulating vs distributing ETFs
To address your specific scenarios directly, here is a concise summary regarding tax efficiency and convenience:
(i) Normal, taxable discretionary investments
For long-term growth in a taxable discretionary investment account, the accumulating ETF (e.g. Satrix ACWI) is generally preferable.
- Reasoning: While the income (the ‘notional distribution’) is still immediately taxable in your hands each year, the accumulating structure provides automatic, cost-free compounding. You avoid the brokerage fees and possible behavioural risk of manually reinvesting cash distributions from a distributing ETF. The accumulating structure also effectively delays the CGT event until you sell the units. The administrative complexity shifts to the manager or administrator to accurately track your adjusted base cost for CGT purposes upon sale.
(ii) Tax-free investment accounts (TFIs)
For investments within a TFI account, the decision hinges on your need for strategic control:
| Investment goal | Recommended ETF type | Reasoning |
| Maximum compounding & convenience | Accumulating ETF (e.g. Satrix ACWI) | All returns are tax-free. The income is automatically reinvested, ensuring immediate, cost-free compounding with zero cash drag. This is the most efficient choice if your intention is always to reinvest into the same fund. |
| Strategic re-allocation | Distributing ETF (e.g. CoreShares Total World) | The cash distributions are paid into your TFI cash balance. You then have the flexibility to manually re-allocate that tax-free cash to an entirely different fund or ETF within the TFI, e.g., shifting from a global equity fund to a local bond fund. |
Tax filing complexity
For tax filing on investments outside of a TFI account, the distinction is subtle but important.
With a distributing ETF, your platform sends you an IT3(b) tax certificate detailing the actual cash dividends and interest you received during the year. With an accumulating ETF, you will still receive an IT3(b) certificate, but the amounts shown represent the notional (accrued) distributions, being the dividends and interest that were automatically reinvested back into the fund on your behalf.
You are still required to declare this notional income on your tax return, just as you would actual distributions, to comply with Sars (South African Revenue Service) regulations.
It is important to note that for investments held within a TFI account, there are no tax filing implications for either ETF type.
The decision to choose accumulating or distributing within a TFI is purely a strategic choice based on your investment goals – compounding efficiency versus reallocation flexibility.
Core conclusion: The accumulating ETF remains the optimal choice for the investor whose primary goal is simple, long-term, compounding growth in the same asset.
However, the distributing ETF provides valuable optionality for an investor who wishes to periodically rebalance or strategically shift the distributions to a different asset class or fund.
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