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Accumulation vs income funds: what’s the difference?

Not sure what the differences are between accumulation and income distributing funds? Learn the differences here, as well as the pros and cons of each. See how each works and which may be a better option for you based on your investment goals. This guide will also reveal the top-performing funds in each category over the last five years.

Please note that past performance is not a reliable indicator of future results.

An introduction to the different types

There are several different fund types that offer accumulating and income options. There are open-ended investment companies (OEICs), unit trusts, and exchange-traded funds (ETFs). This guide will focus on ETFs which trade on the London Stock Exchange. Understanding how they work is important when including them in your investing strategies​.

How do accumulation funds work?

Accumulation funds don’t distribute dividends or interest to shareholders. Rather, when payments are received by the fund, they reinvest it into more assets. The investor still benefits from the dividends because that value has been added to overall value of the fund that they hold, but they don’t ever physically receive distributions/income until they sell the fund.

The advantage of this is that the investor doesn’t have to reinvest money distributed to them. It is done automatically. This allows for compounding to start right away. Having the capital automatically reinvested can also help to save on commissions costs because the investor doesn’t need to make a trade to reinvest funds received.

Accumulating funds may not be good for people who want regular income. The only way to get cash flow from an accumulating fund is to sell. An example of an accumulating fund is the iShares S&P 500 GBP Hedged UCITS ETF (IGUS). The fund doesn’t pay out any dividends. Instead, it automatically reinvests them in the stocks it holds.

How do income or distribution funds work?

Distributing funds, also called income funds, pay out dividends and interest to shareholders. This is typically done monthly, quarterly, or yearly, depending on the fund. Investors who want income will favour income funds, as they can use the distributions however they wish.

The downside is that if the investor does want to reinvest some or all of the proceeds, they will need to do this manually. An example of a distributing fund is the UBS Factor MSCI USA Quality UCITS (GBP Hedged) ETF (UQLT). The fund pays out dividends twice per year.

Which are better: accumulation or income funds?

One type of fund isn’t better than another. In fact, assuming an investor in an income (distributing) fund reinvests their dividends, the performance of an accumulating and distributing fund will be nearly identical.

Which one to invest in is a personal choice based on whether you want to receive the income or have it automatically reinvested. For those planning to reinvest the funds anyway, an accumulating fund will save on commission costs because you don’t have to reinvest the funds yourself. If you plan to reinvest yourself (distributing), you can reinvest in the same ETF or other stocks/ETFs. If putting money into individual stocks, learn how to invest in stocks​ before doing so.

Here’s a chart showing the difference between income and accumulation fund performance. This assumes the fund makes 10% per year and dividends are reinvested. Taxes are ignored and are discussed later.

Accumulating ETF

Year Accumulating ETF price Shares held Value of investment
Now £1.00 10,000 £10,000.00
1 £1.10 10,000 £11,000.00
2 £1.21 10,000 £12,100.00
3 £1.3310 10,000 £13,310.00
4 £1.4641 10,000 £14,641.00
5 £1.6105 10,000 £16,105.10
6 £1.7716 10,000 £17,715.61
7 £1.9487 10,000 £19,487.17
8 £2.1436 10,000 £21,435.89
9 £2.3579 10,000 £23,579.48
10 £2.5937 10,000 £25,937.42

Distributing ETF

Year Accumulating ETF price Shares held Value of investment
Now £1.00 10,000 £10,000.00
1 £1.07 10,280 £10,999.60
2 £1.1449 10,568 £12,099.30
3 £1.2250 10,864 £13,308.87
4 £1.3108 11,169 £14,640.28
5 £1.4026 11,482 £16,104.10
6 £1.5007 11,804 £17,714.62
7 £1.6058 12,135 £19,486.16
8 £1.7182 12,475 £21,434.37
9 £1.8385 12,825 £23,578.24
10 £1.9672 13,184 £25,934.92

The distributing investor would also have £1.63 in cash. A cash balance is created when an investor must reinvest their own capital and can only buy full shares. If an investor were allowed to buy partial shares, then there would be no cash balance left over after reinvesting the dividends. Thus, the total return, including cash, is £25,936.55 for the investor in the distributing ETF.

As you can see, the two funds end up performing nearly identically if you are reinvesting dividends yourself.

List of the best-performing accumulation funds

These are the top-performing accumulating funds listed on the London Stock Exchange over the last five years, representing the return for passive investing. ETFs that are nearly identical to the top performer in the category have been excluded (this is so there aren’t five S&P 500 Information technology ETFs, which are all similar).

All these funds are priced in USD and thus the five-year (22 December 2016 to 22 December 2021) returns are in USD, of which the data is sourced from justETF.

Please remember that past performance is not a reliable indicator of future results.

ETF Ticker Five-year return
iShares S&P 500 Information Technology Sector UCITS ETF USD (Acc) ITTU 278%
Xtrackers MSCI World Information Technology UCITS ETF 1C XDWT 258%
Lyxor Russell 1000 Growth UCITS ETF (Acc) RSGL 197%
iShares Automation & Robotics UCITS ETF (Acc) RBTX 174%
iShares MSCI USA Socially Responsible Investing UCITS ETF USD (Acc) SUAS 152%


For investors wanting to focus on ETFs that are priced in GBP, or are GBP hedged, here are the top performers in that category. Since the funds are priced or hedged to GBP, the returns are in GBP.

ETF Ticker Five-year return
iShares S&P 500 GBP Hedged UCITS ETF (Acc) IGUS 102%
iShares MSCI World GBP Hedged UCITS ETF (Acc) IGWD 80%
UBS MSCI Switzerland 20/35 GBP Hedged UCITS ETF (Acc) UC93 80%
Xtrackers FTSE All-World ex UK UCITS ETF 1C XDEX 77%
Xtrackers MSCI EMU UCITS ETF 2C GBP hedged XD5S 54%

List of the best-performing income or distribution funds

These are the top-performing income funds listed on the London Stock Exchange over the last five years. ETFs that are nearly identical to the top performer in the category have been excluded. All these funds are priced in USD and thus the five-year (22 December 2016 to 22 December 2021) returns are in USD, of which the data is sourced from justETF.

Please remember that past performance is not a reliable indicator of future results.

ETF Ticker Five-year return (dividends reinvested)
Invesco EQQQ Nasdaq-100 UCITS ETF EQQQ 235%
iShares Global Clean Energy UCITS ETF INRG 190%
HSBC MSCI Taiwan Capped UCITS ETF USD HTWN 164%
UBS Factor MSCI USA Quality UCITS ETF (USD) A (dis) UC99 152%
UBS MSCI USA Socially Responsible UCITS ETF (USD) A (dis) UC46 134%


For investors wanting to focus on ETFs that are priced in GBP, or are GBP hedged, here are the top performers in that category. Since the funds are priced or hedged to GBP, the returns are in GBP.

ETF Ticker Five-year return (dividends reinvested)
UBS Factor MSCI USA Quality UCITS ETF (hedged to GBP) A (dis) UQLT 132%
UBS S&P 500 UCITS ETF (hedged to GBP) A (dis) USPG 103%
UBS MSCI Switzerland 20/35 UCITS ETF (hedged to GBP) A (dis) UC94 80%
UBS Factor MSCI USA Prime Value UCITS ETF (hedged to GBP) A (dis) UPVL 74%
iShares MSCI Europe ex-UK GBP Hedged UCITS ETF EUXS 63%

How is income taxed?

If shares are held inside a stocks and shares ISA​, and the portfolio then gains, dividends are not taxed. If the funds are held outside an ISA account or general investment account, then dividends/distributions are taxed in the year received at your dividend tax rate.

Some countries don’t charge taxes on dividends that aren’t received. In the UK, that is not the case. Taxes are paid on dividends earned, even if they are not paid out.

For UK citizens, there is no tax difference between an accumulating and distributing fund. The only difference is that with one, you have the cash and can pay taxes out of it, and with the other, you need to come up with cash from somewhere else to pay the taxes on the dividends (which are still in the fund).

FAQs

Which type of fund pays dividends?

Accumulation funds pay dividends, but they are not distributed. Instead, the funds are reinvested into the fund, which helps compound returns over time. This is the main difference between accumulating versus distributing ETFs. Learn more about dividend investing.

What are the advantages of accumulation funds?

Accumulation funds keep any distributions within the fund, and those funds are reinvested with no commission costs. This saves the investor from having to reinvest the funds manually, which could typically involve paying commissions or other fees. Having the funds reinvested also allows the gains to compound since you are now earning gains on reinvested dividends as well as the initial capital investment.


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