Drought indices are used to identify and monitor drought events. The standardized precipitation evapotranspiration index (SPEI) is a widely used index based on accumulated water balance. There is, however, no broad consensus on which probability distribution is the most appropriate for water balances. This issue is investigated for Ethiopia using 125 meteorological stations spread across the country. Based on long-term series, a selection was made among the generalized extreme value, Pearson type 3, and generalized logistics (Genlog) distributions. Additionally, the effect of using actual, instead of potential, evapotranspiration and a limited amount of data (10, 15, 20, and 25 years) is explored. Genlog is found to be the best distribution for all accumulation periods. Furthermore, there is a considerable difference amongst the SPEI values estimated from the three distributions on the identification of extreme wet or extreme dry periods. Next, there are significant differences between standardized precipitation actual evapotranspiration index (SPAEI) and SPEI, signifying the importance of drought index selection for proper drought monitoring. Finally, time series of 20 or 25 years of data lead to almost similar SPEI values to those estimated using more than 30 years of data, so could potentially be used to assess drought in Ethiopia.