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The key benefit of ETF distributions related to dividends and interest is that they can boost investment returns. When an ETF holds securities that pay out dividends or interest, the distributions made to ETF shareholders can enhance the overall returns of an investment. This is particularly important for investors focusing on income generation or total return strategies, as receiving regular cash distributions allows them to reinvest those funds or use them for expenses, effectively compounding their returns over time.

The other options, while they may have merit in different contexts, do not directly relate to the specific impact of ETF distributions. For example, ETF distributions do not inherently lower annual fees or enhance liquidity; these factors are determined more by the structure of the ETF and market conditions rather than its dividend and interest distributions. Additionally, while distributions might have implications for tax liabilities, they do not outright reduce them. Thus, the most relevant and beneficial aspect of ETF distributions is their potential to increase investment returns.