I am from Europe/Belgium and in Europe it is common to have funds and ETFs which capitalize/re-invest instead of distribute the dividends. I have been looking to the Vanguard ETFs and funds lately, and I noticed that all of them distribute the dividends, usually quarterly. Why is that?
Capitalizing the dividends is very interesting TAX-wise. Some calculations:
Say you have a dividend yield of 3%. Here in Belgium, we have to pay 25% on dividends. In essence, this means that the TER of the fund or ETF increases with 0.03 * 0.25 = 0.75%. Say the TER of the fund of ETF is 0.50%. Adding 0.75%, it is now 1.25%! Suddenly, your fund of ETF is very expensive (in my opinion).
Hence, I almost exclusively invest in funds or ETFs which capitalize the dividends. My only exception are funds or ETFs which have a low or no dividend yield (such as commodities, emerging markets small cap, ...).
Why is this uncommon in US? At first, Vanguards funds or ETFs are very interesting, because of their very low TER, but because of the distributions, it becomes very costly.