The denomination “Distributing ETF” refers to the treatment of dividends that get paid by the underlying companies. A distributing ETF chooses not to reinvest internally these proceeds but rather to hand them out to the investors who have purchased shares of the fund. In this way, by opting for a distributing ETF, an investor will receive regular distributions. This is of course valid if the companies where the ETF invests actually pay out dividends; past distributions are not a reliable indicator for future developments.
A distributing ETF doesn’t seek to exploit the compounding effect. This takes place when the dividends are employed to buy new shares of the fund, which ultimately results in the value of the investment increasing exponentially over time. Moreover, a distributing ETF entails an active management if the investor decides to reinvest elsewhere the dividends; which means investing more time and efforts.
Example of a distributing ETF: VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF
By selecting 100 global stocks screened on their dividend yields, resilience and growth, this ETF makes regular distributions. Thus, it could be an ideal choice for those investors seeking income. However, it should be noted that there is no guarantee that companies who have paid dividends in the past will keep doing so in the future.