1
$\begingroup$

I am learning about investments and I often read that accumulating ETFs re-invest the dividends by buying more stocks of the underling assets. The advantage of this is that by doing so they take advantage of the compounding effect thus leading to an exponential growth of the value of the ETF.

Here you can find exactly what I mean by Degiro (link):

How does an accumulating ETF work? To better understand exactly how an accumulating ETF works, we work through an example. But first, it is important to understand Net Value (NV) and Net Asset Value (NAV). NV is the total value, and NAV is the NV divided by the number of shares issued.

Consider the following:

An ETF has an NV of €500,000 There are 20,000 shares outstanding, making the NAV €25 The ETF is made up of 600 shares of Company A worth €500 per share 2,000 shares of Company B worth €100 per share €0 in cash You bought €5,000 worth of ETF shares, which is 200 shares Say Company A issues a dividend of €2 per share. Since the ETF has 600 shares of Company A, it now has €1,200 in cash thanks to the dividend, bringing the NV to €501,200 and the NAV to €25.06. The value of your portfolio is now €5,012 (€25.06*200 shares).

The compounding effect comes into play when the fund manager uses the €1,200 in cash to purchase new shares. When another round of dividends is issued, this will bring the NV, NAV and your portfolio value up even further, without you having to do anything.

If this was true, why does the ISHARES CORE MSCI WORLD ETF ACC (IE00B4L5Y983) displays an almost linear growth over time rather than exponential? What am I getting wrong?

enter image description here

$\endgroup$
0

1 Answer 1

2
$\begingroup$

You do not need dividend reinvestment to have exponential growth. Anything that grows at a certain rate (say 5% each year) over time will grow exponentially.

However, what you look at is an index the MSCI World index that tracks stocks from 23 developed countries worldwide. Stocks are risky investments and over such a short period of time (2010 to 2023), you could even have negative returns. You would need to look at a much larger time horizon to see the exponential growth.

E.g. Macrotrend shows long term S&P500 data. Looking at your time horizon shows the following:

enter image description here

Now, zooming out reveals this:

enter image description here

However, you could also see a decline in such s short period like the one you selected. enter image description here

or this one:

enter image description here

If you reinvest dividends, you will just add more money into your fund, and thus grow quicker compared to not reinvesting dividends. Ultimately, however, there is no guarantee you will see a positive return over periods of 10 to 15 years.

Looking at a stylized example with 8% growth each year, you can see what difference there is between 14 years and 100 years (start value = 100 for each): enter image description here

$\endgroup$
2
  • $\begingroup$ Thank you for the great answer! One thing I do not understand though. How do ETFs can claim that there is an exponential growth due to accumulating dividends (as I linked in the question) if you actually show that this is not necessary true. An with regards to my specific example, the ETF was created in 2010 so there is no way to see much of the exponential growth anyways. $\endgroup$ Commented Jan 7 at 9:07
  • 1
    $\begingroup$ ETF providers are in the business of selling their product. Not everything a seller claims is always 100% accurate or holds all the time. $\endgroup$
    – AKdemy
    Commented Jan 7 at 11:49

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.