The idea of investing in ETFs was given to me as follows, I'll call this the "compound interest approach":
- Historically speaking, unless you can time the market very well or have a very good mitigation strategy, if you were to make a large investment in an index over a large period of time, say the FTSE 100 for 20 years, and not reinvest the dividends, you would have lost money.
- However, if you did reinvest the dividend, the number of units that you own will typically have increased significantly over time, meaning that, unless your timing is terrible or the market crashes and never recovers, your investment will have acted like compound interest, and therefore grew over time. This question covers the basic argument.
- The above is basically what accumulation-type index-tracking ETFs do, so investing in them is a quick and easy way to do the above.
I bought in to this pitch, read all relevant documents carefully, and picked out an ETF that was from a big bank that was to my liking. Dividend day passed recently and I was surprised to see that my number of units had not gone up. It appears that the ETF that I have chosen reinvests the dividends that it gets from its underlying shares back in to the fund on the dividend day. In other words, rather than increasing my unit number, it increases its own unit price.
My question is this - does an ETF that works how I think mine works benefit from the three-step "compound interest approach" that I've given above? Or, at least mathematically, will it work differently?