This is a small note that may go unnoticed by an uninformed investor. When buying an ETF, whether on the Nasdaq, the MSCI World or the CAC 40, a small mention is found in its name. “Acc” or “Dist”. Or, for American ETFs, “C” or “D”. The version Acc Or C means that the dividends are reinvested, or “capitalized”, that is, you receive nothing in your account, but the value of your share increases accordingly. The version Dist Or D means that they are simply distributed (every month, every quarter, or more rarely every year).
“Capitalizing ETFs are historically the majority in Europe and rare in the United States, just like synthetic ETFs, common in Europe and not very present across the Atlantic”notes Maxime Roussigné, financial investment advisor and moderator of Vos Finances. Indeed, a distributing ETF is useful for an investor who seeks to receive income regularly, and this is often the case for American retirees who rely on capitalization. But for a saver who invests for the long term and is not looking for immediate income, it is better to take the option of the capitalizing ETF, which combines several advantages, starting with taxation.
On a securities account, the big advantage of capitalizing ETFs
In an ordinary securities account, each euro you earn is taxed during the year… and sometimes even, when you receive it. Thus, the dividend of a distributing ETF will immediately be deducted from the single flat-rate levy of 31.4% (12.8% income tax and 18.6% social security contributions since the increase in the CSG). The capital gains will then be declared when you file your income tax return for the year.
Result, out of 1,000 euros of dividends, 314 euros immediately go to the tax authorities, and only 686 euros remain to be replaced. This is what specialists call “fiscal friction”. But the capitalizing ETF removes this friction. You thus continue to earn capital gains on money that you should have returned to taxes. This is the snowball effect of compound interest, all the stronger the further the tax is pushed back in time.
That’s not all: as he distributes nothing, he does not trigger any taxation as long as you do not sell your shares : you only pay on resale, on the capital gain, at the time of your declaration. And if you have capital losses from previous years, they will reduce your tax.
An automatic reinvestment that doesn’t let a euro sleep
A capitalizing ETF is also useful within a tax envelope, such as PEA or life insurance. “In addition to reducing the tax friction linked to the distribution of dividends, mixed capitalizing ETFs, which hold for example stocks and bonds, make it possible to reinvest distributions in a diversified manner »underlines Maxime Roussigné. Indeed, with a distributing ETF, you have to think about reinvesting the dividends received yourself: place an order, sometimes pay brokerage fees, think about it… and above all don’t forget to do all these manipulations. Between two payments, the money sits in the cash account, which is often not remunerated.
On a capitalizing ETF, everything is done by the managerwithout additional costs and without delay: each dividend collected by the fund is immediately put back to work.
