I understand the difference between accumulating and distributing ETFs, my question is how the dividends actually get reinvested?
Say your dividend payout isn’t enough to purchase any new units of the ETF, does it buy fractional units of it? Or does it just save the dividends from each payout until it can afford to reinvest in new units?
Thanks!
I do not KNOW
But my working assumption is the EFT provider accumulate the dividends, buy more shares in the same portfolio and thus push up the overall value of the EFT.
In an accumulative EFT , the dividend is the companies to reinvest - something in the background.
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A distribution EFT would be the type to pay you dividends to do as you see fit.
The number of shares you own does not change. The dividends are reinvested into the ETF, buying more shares for the fund. So the value of your holding increases (i.e. share price).
If the yield is 4%, an accumulating ETF will increase in price an extra 4% compared to the distributing ETF which will give you 4% in cash, in theory.
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ETFs have some flexibility in following the assets. They can deviate a certain percentage (usually mentioned in the prospectus) from the index they follow.
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