Avoiding ETF performance pitfalls

Measuring performance should be straightforward, but the same investment can appear quite different when viewed on other websites. An exchange-traded fund (ETF) is a type of investment fund that holds a diversified portfolio of securities, including stocks and bonds, from numerous companies. 

To make sure you’re not caught out, we explain the main performance pitfalls and the most important differences between various calculation methods, so that you know you’re constantly comparing apples to apples.

The significant factors that can alter an ETF’s return or performance calculation include:

• How distributions are treated
• What time of day the price was taken
• Subtle variations in periods, e.g. the definition of a year
• Which currency is being used
• Currency conversion methodology
• The underlying holdings and assets of an ETF, which can include sometimes thousands of securities from different companies, also play a role in performance calculation.

Slight differences in these factors can lead to significant discrepancies in the performance of an ETF. It can be like comparing the speed of Formula One cars without knowing which are being clocked in miles per hour and which are using kilometres per hour.

So let’s take each factor in turn and show you what to look out for.

Performance treatment of distributions in accumulating and distributing ETFs: addition vs. reinvestment

It can be challenging to compare the returns of a distributing ETF versus an accumulating (or capitalising) one. 

Accumulating ETFs are often labelled with ‘acc’ at the end of their names, indicating that dividends are reinvested automatically rather than distributed to investors. 

A distributing ETF pays out all dividends or interest. 

At the same time, an accumulating ETF reinvests that income back into the fund—so the investor automatically benefits from compounding returns (you earn interest on your interest).

The profits generated by each company held within the ETF are paid out as dividends; companies pay these dividends to the ETF, which then decides whether to distribute them or reinvest them, depending on the fund type. 

Distributing ETFs distribute dividends, which are distributed as money to shareholders, providing regular income that can be used for expenses or reinvested to buy more shares. The more shares an investor owns in a distributing ETF, the more dividend income they receive, as dividends are paid per share. This regular income appeals to investors seeking consistent cash flows, and the money received can help cover personal expenses or be used to purchase more shares.

In contrast, accumulating ETFs reinvest dividends from their underlying holdings automatically, increasing the net value of the fund without incurring extra expense or additional fees for the investor. This reinvestment process is seamless and requires no manual intervention, allowing shareholders to benefit from compounding growth over time.

Without an adjustment, an accumulating ETF will appear to grow faster than a distributing ETF that doesn’t reinvest income.

The most common method of ensuring a fair comparison between distributing and accumulating ETFs is to assume all distributions are reinvested back into the ETF.

This way, you can compare the growth of both types of ETF on a total return basis, including any capital appreciation, as well as the compounding effect of income reinvested in new shares of the fund.

What is the ex-dividend date?

The price of an ETF is reduced by the amount of its forthcoming distribution on the ex-dividend date. This is to ensure a fair price for investors who won’t qualify to receive the dividend if they buy into the ETF on or after the ex-dividend date. 

A seller doesn’t receive the dividend either if they sell before the ex-dividend date. The distribution is paid on the payment date. This date typically occurs several days, or occasionally a few weeks, after the ex-dividend date.

An alternative method is to add the value of the distributions to an ETF’s price, rather than reinvesting them. Distributions treated this way don’t count as producing further income, and so the powerful compound effect is sheared off from the ETF’s track record.

This can lead to a wide performance gap over time between the two methods, especially in growing markets.

Blue  Return with added dividends  Orange Return with reinvested dividends   

Some websites don’t take distributions into account at all. They only track the capital appreciation of an ETF (known as the price return) and completely fail to show the impact that income has on performance.

Price time and the source may differ

The price of an ETF fluctuates constantly as it trades, but its performance is measured by a single price taken at a particular time during the day. ETFs can be bought and sold throughout the trading day on stock exchanges, and their prices may fluctuate based on when they are sold.

Naturally, performance changes depending on when that snapshot is taken.

The official value of an ETF is published daily by the ETF provider and is known as the NAV (Net Asset Value). However, the closing price on a stock exchange may differ significantly.

Therefore, it’s vital to know whether you are looking at the published NAV or the stock exchange price and at what time the price was taken.

The London Stock Exchange closes at 18:30 (EET) while the New York Stock Exchange closes at 23:00 (EET). Four and a half hours is plenty of time for an ETF’s price to change. 

Even if the ETF is no longer traded on the LSE, its underlying stocks may still be traded on a different exchange around the globe, which can impact the ETF’s price. You should use NAV, whenever possible, to calculate performance. However, since the NAV is sometimes published with a delay by the ETF provider, justETF uses stock market closing prices to “bridge” any missing days. To perform pure NAV comparisons, use end-of-month values for comparison.

Currency and exchange rates matter

Performance can be presented in an ETF’s trading currency, fund currency, or in the investor’s home currency. Of course, UK investors care about the return in pounds, but websites that focus on NAV often report it in the fund’s currency.

Platforms always display performance in the investor’s home currency, and it’s also possible to switch between GBP, USD, CHF, or EUR. Some ETFs, such as ETF USD, are denominated in US dollars, so comparing their performance with ETFs in other currencies requires careful attention to currency conversion and exchange rates.

Even when performance is converted into your home currency, metrics can vary depending on the currency exchange rate used.

For example, many websites use the official ECB exchange rate, set at 13:15 (GMT) / 14:15 (EET). However, the Reuters 16:00 CET rate is also widely used.

And because different exchange rates set at various times result in different prices, you end up with an apple-to-orange comparison.

Time period lengths and definitions are inconsistent

You might think we can all agree on what a year is, but creative differences exist even here.

Many websites offer to display the last calendar year or rolling periods of three and five years, but performance comparisons only work if the start and end dates are consistent.

The starting date of a year is particularly troublesome, as some define it as the last banking day of the previous year, while others plump for the first banking day of the year. In the latter case, the value of the first day is over-emphasised, as the NAV is usually calculated at the end of the day.

To remove any doubt, look for a website that displays the dates covered by the performance period you’re interested in.

Price return charts versus total return charts

Finally, be aware of whether you’re being shown a price return or a total return chart. A price return chart reveals historical buying prices, but discards the distributions side of performance.

A total return chart assumes all distributions are reinvested and gives the complete performance picture.

Tax efficiency and after-tax performance pitfalls

When comparing the performance of exchange-traded funds, it’s easy to overlook the impact of taxes—but tax efficiency can make a significant difference to your long-term returns. The choice between accumulating ETFs and distributing ETFs is not just about how income is handled; it also has significant tax implications that can affect your financial well-being.

In many regions, the way dividend income is taxed can influence whether accumulating or distributing ETFs are more tax-efficient. 

In Estonia and other European countries, tax rules can be more favourable for accumulating ETFs. In some jurisdictions, taxes on dividends are only triggered when the income is actually paid out to the investor. As a result, accumulating ETFs—where dividends are reinvested and not paid out as cash—can allow investors to defer taxes, potentially compounding their returns more efficiently over time. This makes accumulating funds an attractive option for long-term investors seeking to maximise the total value of their investments.

It’s also important to consider how the net asset value (NAV) of accumulating ETFs grows as dividends are reinvested. While this can boost the value of your investment, it may also result in a higher capital gains tax bill when you eventually sell the ETF, as the NAV reflects all reinvested income. In contrast, distributing ETFs pay out dividends regularly, which can keep the NAV more stable but may result in ongoing income tax liabilities as you receive cash payments.

Your individual circumstances—such as your investment goals, risk tolerance, and eligibility for tax reliefs—should play a key role in your decision. 

To make an informed choice, it’s helpful to compare the after-tax performance of both types of ETFs using a benchmark like the MSCI World index, which tracks stocks from developed markets. Many providers, such as iShares Core, offer both accumulating and distributing versions of popular ETFs, allowing investors to select the option that best matches their investment strategy and personal tax situation.

Ultimately, the right choice between accumulating and distributing ETFs depends on your individual circumstances, including your tax position, investment goals, and how you want to receive income generated by your investments. Understanding the tax implications of your ETF choices—and seeking advice from a financial advisor if needed—can help you optimise your returns and achieve your long-term financial objectives.

Checklist: What to look out for when comparing ETF performance

Here’s a quick summary of the important factors when comparing the performance of an ETF on different sites:

• Do prices use the official NAV, or stock exchange quotes?
• From which trading centre do the stock exchange prices originate? 
• What time were the prices taken?
• Are distributions included?
• If yes, are the distributions added onto the NAV (or stock exchange price), or are they (mathematically) reinvested?
• Which currency is being used?
• Which exchange rate is used for currency conversion?
• Does the website show price return or total return charts?