Dividend etf vs index etf

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Mutual fund vs. ETF: Are ETFs a better investment?

Mutual funds and exchange-traded funds (ETF) can both offer many benefits for your portfolio, including instant diversification at a low cost. But they have some key differences, in particular, how expensive the funds are. Overall, ETFs hold an edge because they tend to use passive investing more often and have some tax advantages.

Here is what differentiates a mutual fund from an ETF, and which is better for your portfolio.

Mutual funds vs. ETFs: Similarities and differences

Mutual funds remain top dog in terms of total assets, thanks to their prominence in retirement plans such as 401(k)s. U.S. mutual funds had around $23.9 trillion, at the end of 2020, compared to $5.4 trillion in ETFs, according to the Investment Company Institute. But ETFs have been growing quickly in the last decade, as investors are drawn by their low fees and ease of trading.

Both types of funds allow you to invest in a diversified portfolio by buying just one security. For example, you can buy an index fund based on the Standard & Poor’s 500 Index (S&P 500) of top American companies as either a mutual fund or an ETF. Or you could buy a portfolio of bonds with either. Some funds allow you to buy gold or all the companies in a certain industry, for example.

Mutual funds: An overview

Mutual funds are an older way of allowing a group of investors to own a share in a larger portfolio. Mutual funds tend to be actively managed, so they’re trying to beat their benchmark, and may charge higher expenses than ETFs, including the possibility of sales commissions. Mutual funds typically have minimum initial purchase requirements, and they can be purchased only after the market is closed, when their net asset value (NAV) is calculated and set.

ETFs: An overview

ETFs are a newer way of allowing investors to own a share in a larger portfolio. ETFs tend to be passively managed, meaning their holdings track a preset index of securities rather than having a portfolio manager picking them. They generally charge low expenses and have no sales commissions. ETFs usually do not have a minimum initial purchase requirement, though some brokers may not allow you to buy fractional shares of them. ETFs are traded during the day like a stock and their price can fluctuate around their net asset value.

Whether you’re buying a mutual fund or an ETF, you can invest in a diverse selection of assets.

Type of assetsStocks, bonds, gold, etc.Stocks, bonds, gold, etc.
Type of fund managementMore actively tradedMore passively traded
Fund expense ratiosHigherLower
Brokerage commissionsOften $0, but may range up to $50Typically $0
Sales commissions (loads)Often none, but sometimes 1 or 2 percentNone
When you can tradePriced at the end of the trading dayCan be purchased throughout the trading day
Tax efficiencyLowerHigher

Active management vs. passive management

How a fund actually invests has a lot to do with your costs and potential returns. Some funds engage in what’s called active management, in which the fund’s manager picks and chooses stocks to buy and sell, and when to do so. This approach is more typical for mutual funds.

The other approach is called passive investing, and it’s where the fund manager doesn’t select the investments but rather mimics an index that’s already been selected, such as the S&P 500. This approach is more typical of ETFs, though ETFs may sometimes be actively managed.

So generally speaking mutual funds have been actively managed, whereas ETFs have been passive. But these lines have blurred somewhat and it’s possible to find actively managed ETFs and passively managed mutual funds.

This difference matters for a couple key reasons: the returns you’re likely to see as an investor and the expense ratio you’re likely to pay.

Fund returns and costs

Here’s the upshot of the active vs passive debate: passive investing does better most of the time. In fact, a recent report from S&P Dow Jones Indices shows that 94 percent of active managers in large companies were unable to beat the market over a 20-year period ending June 30, 2021.

Yes, the best funds can beat their benchmarks (often the S&P 500) in a given year, but over time it’s tough for active managers to outperform.

In passive investing the goal is not to beat the market, as is usual for active managers. Instead, passive investors are simply looking to be the market. And if passive investing outperforms the vast majority of investors, it also means you can beat most active professional managers.

That gives an advantage to ETFs, which are typically passively managed, though again some mutual funds are also passively managed. You’ll need to read the fund’s prospectus to see.

Active management has another downside: it tends to cost more than a passively managed fund. The emergence of lower-cost ETFs has helped reduce the expenses in mutual funds.

As you can see in the chart below, expense ratios on funds have been falling for the past two decades. Expenses for stock mutual funds still remain above those for ETFs, whether you’re comparing a simple average or an asset-weighted average (factoring in how big the fund is).

The simple average gives you an idea of what you’d likely pay if you picked funds at random, while the asset-weighted average tells you what a typical investor might actually be paying. So mutual funds are quite a bit more expensive than ETFs, comparing their respective averages.

For example, in 2020 an average mutual fund (asset-weighted) would cost 0.50 percent of your assets each year. In practical terms, it would cost $50 for every $10,000 you have invested. In contrast, the comparable average ETF has an expense ratio of just 0.18 percent, or $18 annually for every $10,000 invested.

But the details differ when you dig in. If you focus on passively managed stock mutual funds, they’re actually cheaper than passively managed stock ETFs, as you can see in the chart below.

So in 2020, stock index mutual funds charged an average of 0.06 percent (asset-weighted), while a comparable stock index ETF charged 0.18 percent.

An actively managed mutual fund may also ding your returns in another way, by running up your tax bill. Because it trades in and out of the market, an actively managed fund recognizes capital gains more frequently than a passively managed fund such as most ETFs. It must pass on some of those taxable capital gains distributions to investors at the end of the year.

In addition to these costs, investors in mutual funds may also have to watch out for sales commissions, too, which can quickly eat up your principal before you’ve even invested your money. That’s not a cost that’s associated with ETFs.

Whether you go with an ETF or mutual fund, be sure to check the expense ratio and any other costs of the fund. Costs are a huge driver of your return, and experts suggest that you focus on those first, especially for index funds, where everyone is tracking the same index anyway.

Commissions and minimum purchases

In the category of commissions, ETF investors are real winners. The big-name brokerages have slashed commissions to zero on all ETFs offered on their site. So it won’t cost you anything to trade these funds, though some brokers may impose an early redemption fee. That’s a huge boon for investors, especially if you like to dollar-cost average on your purchases.

But that’s not the case for mutual funds, where some still charge sales commissions that might run you one or two percent of your money but sometimes even more. Fortunately, many good mutual funds no longer charge these fees, and it’s relatively easy to avoid them. You should avoid these fees, since they enrich the fund-management firm at the expense of your returns.

And brokerages may also charge you a fee for trading mutual funds – some may run nearly $50 per trade – though the best brokers offer many funds without a trading commission at all.

As for a minimum purchase amount, ETFs often have an advantage here, too. Usually a broker may require you to buy at least one share of a fund in order to make a purchase, though these days many brokerages allow you to buy fractional shares. Even if you have to buy a full share, that might cost you as little as $20 up to perhaps $250, still a relatively small amount.

In contrast, some mutual funds may require you to purchase at least $2,500 to get started, if you’re opening your own individual account, with smaller minimum subsequent deposits. Some mutual funds also charge early redemption fees if you sell your position in less than 30 days.

When you can buy mutual funds and ETFs

When you can purchase a mutual fund or ETF differs. Mutual funds are priced only at the end of each trading day. While you can place your order at any time, it won’t be filled until the exact price of the fund is tallied up at day’s end. So you won’t know what you’re paying until the transaction is complete. But you’ll always pay the exact net asset value of the fund’s holdings.

In contrast, an ETF trades like a stock on an exchange, and you can buy whenever the market is open. You can place your buy or sell order as you would for a stock, and see the exact price you pay when the order is executed. Unlike a mutual fund, you may end up paying much more or much less than the fund’s actual net assets, though the difference is usually negligible.

This trading flexibility has helped make ETFs a popular way to invest.

Mutual funds or ETFs: Which one should you choose and why?

In many ways mutual funds and ETFs do the same thing, so the better long-term choice depends a lot on what the fund is actually invested in (the types of stocks and bonds, for example). For instance, mutual funds and ETFs based on the S&P 500 index are largely going to perform the same for you. But actively managed funds may have widely different results, depending on how they’re invested.

Where the differences come in, however, are in the fees, commissions, and other costs associated with your choice. And in these respects, ETFs have an edge on mutual funds. They also have an edge in terms of their tax efficiency, helping to reduce your overall tax burden.

Do ETFs and mutual funds pay distributions?

Mutual funds may pay distributions at the end of the year, while ETFs may pay dividends throughout the course of the year. But there’s a difference in these payouts to investors, and ETF investors have an advantage here, too.

ETFs may pay a cash dividend on a quarterly basis. Each share will receive a specific amount, so the more shares you own, the higher your total payout. But not all funds offer dividends, even if they do provide a cash payout. For example, fixed income ETFs technically pay out interest instead.

ETF distributions can be either qualified or non-qualified. The difference between the two depends on how they are taxed and how long the stock within the ETF is held:

  • Qualified dividends are paid on stock held by the ETF. The share must be owned for more than 60 days during a 121-day period that begins 60 days before the ex-dividend date. Qualified dividends are taxed at the capital gains tax rate.
  • Non-qualified dividends are taxed at ordinary income rates.

Mutual funds may also issue a payout, and it may be paid regularly throughout the year or, more often, at the end of the year in one lump sum distribution. Investors may also be able to take advantage of the rules surrounding qualified dividends to achieve a lower tax rate on payouts.

But mutual funds may also expose investors to an additional tax complication. That’s because mutual funds are required to distribute their realized capital gains at the end of the year. While you receive the payout in cash, you may then have to turn around and pay taxes on it to the IRS. These tax considerations don’t apply to mutual funds held in tax-advantaged accounts.

Even if the mutual fund isn’t trading a bunch of stocks as part of its strategy, the act of redeeming shares for outgoing investors can force managers to sell shares of the investments in the fund, potentially creating a capital gain.

Additionally, if you buy the fund late in the year, you could still be paying a tax bill for events that happened before you made the investment.

Which one is safer?

In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds and corporate bonds come with somewhat more risk than U.S. government bonds. But higher risk (especially if it’s diversified) may deliver higher long-term returns.

That’s why it’s critical that you understand the characteristics of your investments, and not just whether the fund is an ETF or mutual fund. A mutual fund or ETF tracking the same index will deliver about the same returns, so you’re not exposed to more risk one way or the other.

Bottom line

For many different purposes, an ETF is a better option for investors, because it offers some tax advantages, low commissions and easy tradability. But in other specific circumstances, notably for stock index funds, mutual funds can actually be cheaper than ETFs, and if they’re held in a tax-advantaged account, their tax implications are irrelevant anyway. Either way, you need to know what your funds are invested in and how they help you achieve your financial goals.

Learn more:

Sours: https://www.bankrate.com/investing/mutual-fund-vs-etf-which-is-better/

How Do ETF Dividends Work?

Although exchange traded funds (ETFs) are primarily associated with index-tracking and growth investing, there are many that offer income by owning dividend-paying stocks. When they do, they collect the regular dividend payments and then distribute them to the ETF shareholders. These dividends can be distributed in two ways at the discretion of the fund's management: cash paid to the investors or reinvestments into the ETFs' underlying investments.

The Timing of ETF Dividend Payments

Similar to an individual company's stock, an ETF sets an ex-dividend date, a record date, and a payment date. These dates determine who receives the dividend and when the dividend gets paid. The timing of these dividend payments is on a different schedule than those of the underlying stocks and vary depending on the ETF.

For example, the ex-dividend date for the popular SPDR S&P 500 ETF (SPY) is the third Friday of the final month of a fiscal quarter (March, June, September, and December). If that day happens to not be a business day, then the ex-dividend date falls on the prior business day. The record date comes two days prior to the ex-dividend date. At the end of each quarter, the SPDR S&P 500 ETF distributes the dividends.

Each ETF sets the timing for its dividend dates. These dates are listed in the fund's prospectus, which is publicly available to all investors. Just as like any company's shares, the price of an ETF often rises before the ex-dividend date—reflecting a flurry of buying activity—and falls afterward, as investors who own the fund before the ex-dividend date receive the dividend, and those buying afterward do not.

Dividends Paid in Cash

The SPDR S&P 500 ETF pays out dividends in cash. According to the fund’s prospectus, the SPDR S&P 500 ETF puts all dividends it receives from its underlying stock holdings into a non-interest-bearing account until it comes time to make a payout. At the end of the fiscal quarter, when dividends are due to be paid, the SPDR S&P 500 ETF pulls the dividends from the non-interest-bearing account and distributes them proportionally to the investors.

Some other ETFs may temporarily reinvest the dividends from the underlying stocks into the holdings of the fund until it comes time to make a cash dividend payment. Naturally, this creates a small amount of leverage in the fund, which can slightly improve its performance during bull markets (rising prices) and slightly harm its performance during bear markets (falling prices).

Dividends Reinvested

ETF managers also may have the option of reinvesting their investors' dividends into the ETF rather than distributing them as cash. The payout to the shareholders can also be accomplished through reinvestment in the ETF's underlying index on their behalf. Essentially, it comes out to the same: If an ETF shareholder receives a 2% dividend reinvestment from an ETF, they may turn and sell those shares if they would rather have the cash.

Sometimes these reinvestments can be seen as a benefit, as it does not cost the investor a trade fee to purchase the additional shares through the dividend reinvestment. However, each shareholder's annual dividends are taxable in the year they are received, even if they are received via dividend reinvestment.

Taxes on Dividends in ETFs

ETFs are often viewed as a favorable alternative to mutual funds in terms of their ability to control the amount and timing of income tax to the investor. However, this is primarily due to how and when the taxable capital gains are captured in ETFs. It is important to understand that owning dividend-producing ETFs does not defer the income tax created by the dividends paid by an ETF during a tax year. The dividends that an ETF pays are taxable to the investor in essentially the same way as the dividends paid by a mutual fund are taxable.

Alternative Income ETFs and Your Portfolio

Examples of Dividend-Paying ETFs

Here are five highly popular dividend-orientated ETFs.

1. The SPDR S&P Dividend ETF (SDY)

The SPDR S&P Dividend ETF (SDY) is the most extreme and exclusive of the dividend ETFs. It tracks the S&P High-Yield Dividend Aristocrats Index, which only includes those companies from the S&P Composite 1500 with at least 20 consecutive years of increasing dividends. Due to the long history of reliably paying these dividends, these companies are often considered less risky for investors seeking total return.

2. The Vanguard Dividend Appreciation ETF (VIG)

The Vanguard Dividend Appreciation ETF (VIG) tracks the S&P U.S. Dividend Growers Index, a market capitalization-weighted grouping of companies that have increased dividends for a minimum of ten consecutive years. Its assets are invested domestically, and the portfolio includes many legendary rich-paying companies, such as Microsoft Corp. (MSFT) and Johnson & Johnson (JNJ).

3. The iShares Select Dividend ETF (DVY)

The iShares Select Dividend ETF (DVY) is the largest ETF to track a dividend-weighted index. Similar to VIG, this ETF is completely domestic, but it focuses on smaller companies. Roughly one-quarter of the 100 stocks in DVY's portfolio all belong to utility companies. Other major sectors represented include financials, consumer staples, energy, and communication stocks. 

4. The iShares Core High Dividend ETF (HDV)

BlackRock's iShares Core High Dividend ETF (HDV) is younger and uses a smaller portfolio than the company's other notable high-yield option, DVY. This ETF tracks a Morningstar-constructed index of 75 U.S. stocks screened by dividend sustainability and earnings potential, which are two hallmarks of the Benjamin Graham and Warren Buffett school of fundamental analysis. In fact, Morningstar's sustainability ratings are driven by Buffett's concept of an "economic moat," around which a business insulates itself from rivals.

5. The Vanguard High Dividend Yield ETF (VYM)

The Vanguard High Dividend Yield ETF (VYM) is characteristically low-cost and straightforward, similar to most other Vanguard offerings. It tracks the FTSE High Dividend Yield Index effectively and demonstrates outstanding tradability for all investor demographics. One particular quirk of the investment strategy for VYM is its focus on companies that pay very high dividends. As a result, this ETF's majority holdings are heavy in the financial and consumer staples sectors.

Other Income-Oriented ETFs

In addition to these five funds, there are dividend-focused ETFs that employ different strategies to increase dividend yield. ETFs such as the iShares Preferred and Income Securities ETF (PFF) track a basket of preferred stocks from U.S. companies. The dividend yields on preferred stock ETFs should be substantially more than those of traditional common stock ETFs because preferred stocks behave more like bonds than equities and do not benefit from the appreciation of the company's stock price in the same manner.

Real estate investment trust ETFs such as the Vanguard Real Estate ETF (VNQ) track publicly traded equity real estate investment trusts (REITs). Due to the nature of REITs, the dividend yields tend to be higher than those of common stock ETFs.

There are also international equity ETFs, such as the WisdomTree Emerging Markets High Dividend Fund (DEM) or the First Trust Dow Jones Global Select Dividend Index Fund (FGD), which track higher-than-normal dividend-paying companies domiciled outside of the United States.

The Bottom Line

Although ETFs are often known for tracking broad indexes, such as the S&P 500 or the Russell 2000, there are also many ETFs available that focus on dividend-paying stocks. Historically, from 1930 to 2020, dividends have accounted for an average of 41% of the total returns of the stock market, and a strong dividend payout history is one of the oldest and surest signs of corporate profitability.

Sours: https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp
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ETF Vs Index Fund: What’s The Difference?

Rather than trying to beat the market, many people choose to be the market by investing in passively managed funds. Over the long term, passive investment vehicles—like exchange traded funds (ETFs) and index funds—have consistently outperformed the vast majority of active funds, making them great choices for most investors. So what’s the difference between an index fund and an ETF? Which is best for your portfolio?

ETF vs Index Fund—Similarities

All index funds and the vast majority of ETFs use the same strategy: Passive index investing. This approach seeks to passively replicate the performance of an underlying index, providing easy diversification and sustainable long-term returns.

Diversification

Index funds and ETFs provide a simple way to diversify your portfolio. Both offer exposure to hundreds or even thousands of securities, depending on the index they emulate. This can greatly decrease the likelihood your portfolio will be adversely impacted by big market swings.

Prices of individual stocks may swing wildly day to day, but the S&P 500 loses or gains less than 1% per day, on average. Investing in an index fund or an ETF that tracks the S&P 500 doesn’t protect you from all or any losses, but it does reduce the risks and volatility you’d experience if you only held a few individual stocks.

Sustainable Long-Term Gains

Broad-based, passively managed ETFs and index funds have outperformed actively managed mutual funds over the long term.

An elite minority of active managers may deliver impressive results over shorter periods of time by picking individual securities, but it’s exceedingly rare that they can sustain a winning record over decades. In fact, over the past 15 years, more than 87% of actively managed funds have underperformed their benchmarks, according S&P Global.

What does that mean for your investment in an index fund or ETF? Over the long term, the S&P 500 has seen average annual returns of about 10%. You won’t get that number every year—some years it’ll be higher; some years it’ll be lower—but on average, it’s enough to double your money every 7.2 years or so.

Low Fees

Index funds and index ETFs generally have much lower expense ratios than actively managed funds. The Investment Company Institute’s latest survey of expense ratios looked at the average expense ratios of actively managed equity mutual funds versus index equity funds and index equity ETFs.

  • Actively managed equity mutual funds charged an average of around 0.74%.
  • Equity index funds charged an average expense ratio of 0.07%.
  • Equity index ETFs charged an average expense ratio of 0.18%. (It’s not uncommon to see index ETFs with much lower expense ratios, though.)

While they may seem insignificant, expense ratios can really eat into your total returns over time. Assuming you invested $6,000 a year for 30 years and saw an average annual return of 6%, investing in the average index mutual fund would save you almost $60,000 over the cost of the average actively managed mutual fund.

Indexed, passive investing reduces your overall costs and leaves more of your money at work in your portfolio.

ETF vs Index Fund—Differences

One of the most significant differences between an index fund and an ETFs is how they trade. Shares of ETFs trade like stocks; they’re bought and sold whenever markets are open. While you can order index fund shares whenever you wish, share purchases only happen once a day, after the markets close. This means that the price of any given ETF fluctuates throughout the trading day, while the price of an index fund only changes once a day.

Trading Fees

While both index funds and ETFs charge low expense ratios, additional fees beyond the expense ratio may look very different.

Most brokers have eliminated trading commissions on nearly all stock trades, and many charge no commission for ETF trades, either. Meanwhile, a broker’s sales commissions for index funds can be very expensive. That said, online brokers generally offer a selection of commission-free funds. There’s just no guarantee that the funds you want to buy are free of commissions.

Then there are load fees, another form of sales commission. Front-end load fees may be charged for buying funds while back-end load fees may be charged for selling funds. Load fees can be a percentage of your total purchase or a flat fee. ETFs lack load fees entirely.

So a given ETF may charge a higher annual expense ratio than an index fund you have your eye on, but you need to take into account the potential commissions and sales load fees charged by a comparable index fund.

Minimum Investment Amounts

Many index funds have minimum investment requirements, sometimes in the thousands of dollars. ETFs have no minimum purchase requirements.

While some index fund providers have lower minimums if you set up regular contributions to a tax-advantaged retirement account, they can still be substantial.

Fractional Shares

Until recently, most ETFs were not available as fractional shares (depending on your brokerage, they still might not be). Index funds, on the other hand, have always been available in fractional amounts.

When you buy into an index fund, managers convert the dollar value of your investment into the correct number of shares based on the NAV the day of your purchase, regardless of whether you end up with a fractional share or not.

Fractional shares have the potential to help you get your money in the market sooner by letting you buy parts of full shares of funds instead of purchasing full, pricier shares. This also lets you better take advantage of dollar-cost averaging, which may help you pay less per share overall over time.

Tax Implications

ETFs are generally more tax efficient than mutual funds. While you will pay capital gains taxes on any gains you realize when you sell shares of an index fund or an ETF, you do not pay taxes when the holdings in the ETF portfolio are adjusted by managers.

Index funds, on the other hand, must buy and sell assets to adjust their portfolio to track the underlying index. The cost of any capital gains taxes from these sales are taken out of the fund portfolio NAV, which impacts the value of your index fund shares. That said, index fund holdings rarely change, so this may not be a huge issue for you.

Availability

ETFs are very seldom available as investment options in defined contribution plans, like 401(k)s. Generally, index funds and actively managed mutual funds are your only choice. When index fund and mutual fund shares are purchased in a retirement plan, there generally aren’t minimum minimum purchase requirements.

If you save for retirement in an IRA, you’ll have access to a very wide range of ETFs and index funds. If you invest extra funds in a taxable investment account via an online brokerage, you’ll probably have access to all available funds and ETFs. In this case, minimum investment amounts and the availability of fractional shares may impact your choice of ETF vs index fund.

Should You Invest in ETFs or Mutual Funds?

In the end, the choice of ETF vs index fund is probably less important than the fact that you’re decided to invest for your long-term goals using a passive investing vehicle. Whether you choose an index ETF or index mutual fund, you’ll benefit from lower fees, diversification and historically superior performance of index-based investing.

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Sours: https://www.forbes.com/advisor/investing/etf-vs-index-fund/
Fidelity Dividend Index ETFs Review

Dividend vs. Index Investing: Both have appeal for investors—and some investments combine the two

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Vs dividend index etf etf

ETF vs. Index Fund: What Are the Differences?

ETFs and index funds have a lot in common. Both are passive investment vehicles that pool investors' money into a basket of securities to track a market index. While actively managed mutual funds are intended to beat a certain benchmark index, ETFs and index mutual funds are usually intended to track and match the performance of a particular market index.

But the differences between an ETF (exchange-traded fund) and an index fund are not as insignificant as they might seem. It isn't just about performance or which type of fund has the best returns.

ETFs vs index funds

The differences between them boil down to four main areas -- fees, minimums, taxes, and liquidity -- all of which can help you to determine which one is your best option.

1. Fees and expenses

The primary difference between ETFs and index funds is how they're bought and sold. ETFs trade on an exchange just like stocks, and you buy or sell them through a broker. Index funds are bought directly with the fund manager. 

Because ETFs are bought and sold on an exchange, you will pay a commission to your broker each time you make a trade. (That said, some brokers offer commission-free trading.)

Dividend distributions compound the issue of the differences between how ETFs and index funds are bought and sold. Dividends paid by index mutual funds can be automatically reinvested (fee-free!) into more shares of the fund.

However, when an ETF pays a dividend, you'll need to use the proceeds to buy more shares, incurring additional commissions and spending time logging into your account to make a quick trade. Some brokers may offer an automatic dividend reinvestment plan on a limited set of ETFs.

ETFs generally have a slight advantage when it comes to annual expense ratios -- which is the percentage of assets you'll pay for managing the fund. But the difference between expense ratios for widely traded ETFs and index funds has narrowed in recent years and nearly disappeared. For more niche indexes, though, expense ratios could differ widely, usually favoring the ETF.

2. Minimum investments

You can invest in an ETF by buying as little as one share, which used to be the easiest way to start investing with very little capital. Several fund managers have lowered their minimum investments for their most popular index funds, so these days you can get started with a relatively small amount of money. The following table shows the minimum investments for S&P 500 mutual funds from three leading asset managers.

Index Fund Manager

Initial Minimum

Minimum Additional Investment

Fidelity

$0

$0

Vanguard

$3,000

$1

Charles Schwab

$0

$0

Data source: Company websites.

3. Tax differences

Long-term investors who are saving for retirement should use tax-advantaged retirement accounts such as 401(k)s and IRAs. I say this not just because it's smart -- because we all know minimizing taxes means more money left in your pocket -- but also because it means you can completely ignore the complicated details of the tax consequences of investing in different types of funds.

Index funds and ETFs are both extremely tax-efficient -- certainly more so than actively managed mutual funds. Because index funds buy and sell stocks so infrequently, they rarely trigger capital gains taxes for investors.

When it comes to tax efficiency, ETFs have the edge. Unlike index funds, ETFs rarely buy or sell stock for cash. When an investor wants to redeem shares, they simply sell them on the stock market, generally to another investor.

When an index fund investor wants to redeem an investment, the index fund may have to sell stocks it owns for cash to pay the investor for the shares. This means mutual funds have to realize capital gains by selling stocks, which results in capital gains (and taxes) for everyone who continues to hold the fund, even if they are currently losing money on their investment.

4. Liquidity

Liquidity, or the ease with which an investment can be bought or sold for cash, is an important differentiator between ETFs and index funds. As previously mentioned, ETFs are bought and sold like stocks, meaning you can buy or sell them anytime the stock market is open.

On the other hand, index fund transactions (like those of all mutual funds) are cleared in bulk after the market closes. Thus, if you put in an order to sell shares of an index fund at noon, the transaction will actually take place hours later at a price equal to the value of the fund at market close. Typically the cutoff time is 4 p.m. ET. Orders entered after the cutoff are pushed into the next day and completed at the fund's net asset value a day later.

If you consider yourself a trader, this matters. If you consider yourself a long-term investor, it really doesn't matter much at all.

ETFs or index funds: Deciding what's right for you

An ETF is best if you're an active trader or simply like to use more advanced strategies in your purchases. Since ETFs are bought and sold on exchanges like stocks, you can buy them using limit orders, stop-loss orders, or even margin. You can't use those kinds of strategies with mutual funds.

If you're investing in a taxable brokerage account, you may be able to squeeze out a bit more tax efficiency from an ETF than an index fund. However, index funds are still very tax-efficient, so the difference is negligible. Don't sell an index fund just to buy the equivalent ETF. That's just asking for all sorts of tax headaches.

Buy an index fund if your broker charges high commissions on your purchases and you want to be fully invested at all times. In some cases, you may be able to start investing in index funds with a lower minimum than for its equivalent ETF.

Index funds are also a great option when the equivalent ETF is thinly traded, creating a large spread in the difference between the ETF price on the exchange and the value of the underlying assets held by the ETF. An index fund will always price at the net asset value.

Always compare fees to make sure you're not paying too much of a premium for your choice. If you're on the fence between an ETF and an index fund, the expense ratio could be a good tiebreaker.

Sours: https://www.fool.com/investing/how-to-invest/etfs/etf-vs-index-fund/
Dividend Investing -- ETFs vs Individual Stocks
Decorative graphic.

Most investors understand what stocks are and how they work. A lot of investors also know about exchange-traded funds (ETFs), which trade like stocks in that they are available to buy and sell while the market is open, but typically mimic a basket of securities similar to index mutual funds. Unlike mutual funds, which trade at the end-of-day NAV, ETFs trade like any exchange-traded security (with intraday pricing). Of course, there is also the increasing prevalence of active ETFs that have additional unique aspects.

However, there are some prevalent misconceptions associated with ETFs. Here are 5 aspects of equity (i.e., stock) ETFs that may surprise you.

1. Are all ETFs relatively cheap?

A characteristic of ETFs that has helped drive their popularity among investors is cost relative to other funds. Indeed, the decline in expense ratios for both ETFs and mutual funds is a longer-term trend that largely reflects competition driving down costs (see Fund expenses have been in decline for over a decade).

Fund expenses have been in decline for over a decade

The data in the chart is described in the text.

Data represents asset-weighted average expense ratios for all US equity mutual funds vs. all US equity ETFs. Fund of funds excluded. Source: Morningstar Direct, Fidelity Investments, as of September 1, 2021.

Several factors have contributed to the trend, including expense ratios varying inversely with fund assets, a shift toward no-load share classes for long-term mutual funds, economies of scale, investor preferences, and competition from ETFs.

Most comparable ETFs continue to be less expensive than mutual funds. But it’s a mistake to assume that all ETFs are cheaper.

For example, mutual fund Fidelity® 500 Index Fund (FXAIX) has a net expense ratio1 of 0.015%, and it has no transaction fee on Fidelity.com.2 That compares favorably with similar ETFs, such as the SPDR S&P 500 ETF (SPY) with an expense ratio of 0.09% and the iShares Core S&P 500 ETF (IVV) with an expense ratio of 0.03%. It is worth noting that Fidelity offers zero expense ratio index mutual funds.

Of course, expense ratios aren't the only thing to consider when evaluating ETF costs. Tracking error, which is a measure of how well the ETF tracks the performance of a benchmark, can affect the total return of an ETF. If you are looking to simply emulate the performance of a benchmark, like the S&P 500® Index, it may be prudent to seek out ETFs with low tracking error.

Bid-ask spread is another factor that can affect your total cost. An ETF with a wider bid-ask spread—the difference in price between what a buyer is willing to pay and what a seller is willing to receive as payment—may be more costly, all else being equal. You can find an ETF’s bid-ask spread, along with its tracking error and other trading costs, on Fidelity.com on an ETF’s snapshot page. By comparison, mutual funds trade at the net asset value and the buyer/seller is not subjected to a bid-ask spread. 

2. Do ETFs pay dividends?

If a stock is held in an ETF and that stock pays a dividend, then so does the ETF.

While some ETFs pay dividends as soon as they are received from each company that is held in the fund, most distribute dividends quarterly. Some ETFs hold the individual dividends in cash until the ETF’s payout date. Others reinvest the dividends back into the fund as they are received, and then distribute them as cash on the ETF’s payout date.

ETFs may provide the option of forgoing receiving cash in exchange for the purchase of new shares with the dividends received. And certain brokers, including Fidelity, might allow you to reinvest dividends commission-free. You can find out if and how an ETF pays a dividend by examining its prospectus.

3. Are all ETFs passive?

Most ETFs track an index, such as the S&P 500® Index. These types of investments are considered "passively managed." Any purchases or sales of securities by the fund are made to keep the portfolio in line with the index it attempts to track.

"Smart beta" ETFs are a category of ETFs that are passively managed; however, they seek to either improve their return profile or change their risk profile, relative to a market benchmark. This is to say that smart beta ETFs are passively managed in that they attempt to replicate the exposures of a benchmark, but that the composition of the benchmark may not necessarily look like that of any market index, as it has been engineered to represent a targeted factor exposure. This is accomplished by tilting one or more factors of the corresponding benchmark, such as increasing or decreasing exposure to growth or value characteristics relative to a market index. 

There are some ETFs that, by design, do not strictly track an index. Instead, they are actively managed with the goal being to outperform a benchmark like the S&P 500. The fund manager for an actively managed ETF may choose to hold different securities, and/or in different weights versus those of the index that the ETF seeks to outperform.

4. Are all ETFs tax-efficient?

Taxes are an important consideration for any investment held in a taxable account. In general, passive ETFs are considered tax-efficient on an absolute basis due to their unique structure, generally lower portfolio turnover, and how they are managed. One of the primary advantages of the ETF structure is that when an investor buys or sells shares of the ETF, the ETF administrator can match purchases and sales with other investors so that no actual security purchases inside the fund need to be made. As a result, this creation/redemption structure avoids triggering a taxable event.

With that said, not all ETFs are equally tax-efficient.

For example, ETF dividends are subject to taxes, and ETFs that pay nonqualified dividends may be less tax-efficient than those that pay qualified dividends. Annual distributions from an ETF to investors may be treated as qualified or nonqualified dividends. Qualified dividends are taxed at no more than 15%. However, just because the ETF reports that its distribution was a qualified dividend, that does not automatically make it qualified for the investor. The investor must have held the ETF for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. ETF investors, like mutual fund investors, are subject to the relevant tax rates on distributions that flow through to end investors, whether they take the form of dividends on stocks or coupon payments on bonds.

It's also possible to invest tax-efficiently with ETFs by selecting those that minimize capital gains distributions and maximize exposure to qualified dividends, as well as holding tax-inefficient ETFs in tax-deferred or tax-exempt accounts. If minimizing taxes is a concern, consider consulting a qualified tax advisor.

5. Are all ETFs relatively liquid?

A primary advantage of ETFs, compared with other similar mutual funds, is their trading flexibility—continuous pricing and the ability to place limit orders. However, these characteristics do not ensure that all ETFs are highly liquid (with highly liquid meaning you may be able to buy or sell your desired quantity at or near the prevailing market price).

There are several ways you can find highly liquid assets—including ETFs. As previously mentioned, a low bid-ask spread may indicate a robust market of buyers and sellers. Of course, it may not be indicative of the prevailing spread for trades of significantly different size. Average daily volume is another indicator of liquidity. Volume is the number of shares traded: Investments with high volume and, consequently, greater liquidity, tend to be more efficient.

For example, iShares Core S&P 500 ETF (IVV) has a bid-ask spread one-month average of 0.01%, which is as low as this spread can be. Additionally, IVV is in the top quintile of 90-day average volume among ETFs, as shown on Fidelity.com. Some more narrowly focused ETFs have much wider bid-ask spreads, which could cause trading in them to be relatively more expensive.

A few last tips

Once you have identified an ETF in the asset class, sector, or region of the market that you want to invest in, you can use a tool like an ETF screener, for example, to find ETFs in this space with your desired attributes, such as a low average daily bid-ask spread and high average daily trading volume.

Other tools, like Fidelity’s ETF research page, can help you investigate additional characteristics of an ETF you are analyzing, including the underlying fundamentals of the stocks within the fund. Once you home in on an ETF that looks attractive to you, it may also be beneficial to utilize limit orders when placing a trade to ensure that you are executing at a price you are comfortable with. And make sure to evaluate any investment option with your time horizon, financial circumstances, and tolerance for risk in mind.

Sours: https://www.fidelity.com/viewpoints/active-investor/etf-myths

Similar news:

An exchange traded fund, or ETF, is a publicly-traded fund that tracks an index such as the S&P 500. There are thousands of ETFs in the U.S., but only a few hundred funds are specifically classified as dividend ETFs.

Dividend ETFs can provide a number of benefits for investors seeking safe retirement income or long-term growth. In fact, many investors own a combination of dividend ETFs and individual stocks in their portfolios.

However, there is a never-ending debate over the merits of actively picking stocks versus allocating a portfolio completely into low-cost, passively-managed ETFs.

The reality is that an investor’s mix of dividend ETFs and individual stocks almost completely depends on the investor’s personal preferences. There are numerous pros and cons to each approach, and unfortunately there is no one-size-fits-all solution.

In this article, I will evaluate some of the most common questions facing investors who are considering dividend ETFs:

  • What are the pros and cons of owning dividend ETFs?
  • How can I tell which ETFs are “good” ones?
  • Who should buy dividend ETFs?


By the end of the article, you will know the key advantages and disadvantages of investing in dividend ETFs and have an understanding of whether or not dividend ETFs are for you. 

The Benefits of Dividend ETFs

Dividend ETFs offer a number of attractive characteristics. Most notably, in my view, dividend ETFs can save investors a lot of time and potential headaches compared to owning individual stocks.

The majority of dividend ETFs hold between 50 and several hundred companies and are well-diversified across a number of industries.

Purchasing shares of most dividend ETFs provides instant diversification to a portfolio, providing an investor with some protection against being overly exposed to a sector that falls out of favor.

Perhaps more importantly, dividend ETF investors do not need to worry much about monitoring their holdings because many ETFs are diversified across hundreds of companies.

In other words, no single company is likely going to make or break the performance of an ETF, so there is practically no need to stay up to date on news about individual businesses owned in the fund.

Once an investor has found a diversified dividend ETF that comes close to matching his or her objectives, the investor can simply focus on accumulating as many shares as possible and letting the investment ride for the long term.

While ETFs will rise and fall with the underlying indexes that they follow (there is always market risk), it should be easier, in theory, for investors to ride out price volatility in diversified ETFs compared to individual stocks.

For example, suppose you owned a portfolio of 20 individual dividend stocks, and Cisco was your biggest position at 7% of your portfolio’s total value.

If Cisco were to fall by 30% this year on company-specific news, you would be faced with some very difficult, stress-inducing questions:

  • Cisco has been a dog. Should I sell now?
  • Or is Cisco bottoming out and potentially a bargain? Maybe I should buy?
  • Is the company’s dividend at risk? Why is the stock so weak?


Owning individual stocks requires more time commitment to stay on top of new developments and can sometimes encourage excessive trading activity, which is often the enemy of investment returns.

An investor in dividend ETFs can usually sleep better at night than an investor running a portfolio of individual stocks. For every Cisco owned in a diversified ETF, there is likely to be an equal number of winners to balance things out.

While ETFs will match any steep declines in price of their underlying indexes, prudent investors should know that the collective long-term value of a fund’s diversified holdings has not been impaired – the stock market is simply volatile and unpredictably rises and declines.

Unlike Cisco, where something could be structurally wrong with the company to make its stock a poor long-term investment, it would take some sort of apocalyptic event to impair the long-term value of all of a diversified ETF’s holdings.

Put another way, dividend ETF investors can feel more comfortable buying additional shares on a dip instead of worrying about whether or not the long-term earnings power of their individual stock has been impaired.

Investing in dividend ETFs is also just an easy strategy to follow. Investors who own a portfolio of individual stocks typically have at least several dozen holdings to pick between when they have new money to invest.

Trying to decide which individual stock(s) to buy more of often feels complicated, but an ETF investor can simply allocate across several funds to remain diversified and continue following the underlying index.

Simply put, an ETF strategy is much easier to consistently execute and can help an investor maintain more time in the market to enjoy the benefits of compounding.

Investing in dividend ETFs can be particularly appealing for small investors. Generally speaking, most of the benefits of diversification kick in once a portfolio has accumulated as few as 15 to 20 total holdings spread across different sectors.

While trading commissions are generally quite low today, building a portfolio of 20 stocks can still eat into an investor’s returns if their portfolio value is low.

For example, an investor with $10,000 to invest equally across 20 stocks would target an initial value of $500 per holding. A $10 trading commission equates to a steep 2% fee ($10 / $500), which is incurred again every time the investor buys more shares.

It would probably make more sense for the small investor to achieve appropriate diversification and lower fees by accumulating shares of an ETF until his or her account was more sizeable.

Finally, it’s worth pointing out that even Warren Buffett advocated for passive index funds in his 2013 shareholder letter.

After he passes away and his shares of Berkshire are distributed to charity, Buffett’s trustee has very clear instructions to follow:

"My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."


Warren Buffett owns several dozen dividend-paying stocks in his portfolio, but it’s clear he sees the benefit of cheap, passive indexing – most active investors simply fail to generate performance that justifies their higher fees.


However, there are a number of disadvantages to owning dividend ETFs over individual dividend stocks – especially for conservative retirees primarily focused on capital preservation and safe income generation.

The Downsides of Dividend ETFs

Some dividend ETFs now offer rock-bottom fees as low as 0.05% per year, but ETF investors have no ability to fine-tune a fund for their unique investment objectives and risk tolerance.

For example, suppose a retired investor has $1 million of cash to invest and wants to generate safe income from dividend-paying stocks while preserving capital.

Vanguard is a well-known and trusted brand, and the investor happens to come across the Vanguard High Dividend Yield ETF (VYM).


The fund certainly sounds appropriate for his needs and charges an extremely reasonable fee of 0.08% per year. The fee amounts to less than $1,000 per year for his account and is well worth it for the time savings alone – he can now take a “hands off” approach to generating income by investing in a well-diversified fund.


However, there are a few issues to consider here. First, the fund’s dividend yield is nothing to get overly excited about for current income. It has a dividend yield near 3%, which is too low for many retirees’ income needs.


Second of all, how safe is that income? The Vanguard High Dividend Yield ETF is invested in more than 400 companies – certainly not all of their dividend payments will be safe throughout a full economic cycle.

Unfortunately, we can see that the fund’s dividend payments were hit hard during the last recession. Total dividend payments reached $1.44 per share in 2008 before falling to $1.17 in 2009 and $1.09 in 2010, representing a peak-to-trough decline of about 25%. Annual dividend payments didn’t recover back to their 2008 peak until 2012.

Put another way, if the retired investor above owned 25,000 shares of VYM, he would have received $36,000 of dividend income in 2008.


By 2010, his annual dividend income had fallen to about $27,000 – a drop of more than $725 per month. Depending on his budgeting and margin of safety, life could suddenly have become much more stressful.

Most of the big dividend ETFs available today were launched sometime over the last five years – after the financial crisis. Unfortunately, that severely limits investors’ ability to understand the real risk of dividend cuts that is embedded in most passively-managed dividend ETFs.

Even when times are good, a dividend ETF's income is highly unpredictable, making monthly budgeting in retirement more challenging. ETFs are constantly rebalancing, and the many companies they own are adjusting their dividends up and down throughout the year. Here is a look at VYM's volatile quarterly payouts over the course of several years.

Building a portfolio of several dozen blue chip dividend stocks requires some time, but it also allows investors to customize the dividend yield, diversification, and dividend safety of a portfolio to their unique needs. 

You will also know exactly how much you are getting paid each month of the year since each company has a set dividend payment schedule.


While numerous “safe” dividend stocks such as General Electric and Bank of America surprised investors during the financial crisis and slashed their dividends, I believe it is possible to construct a portfolio with a higher yield and more resilient income stream than what is attainable from dividend ETFs today.

Besides greater customization, accumulating a portfolio of individual dividend stocks lets investors keep more of their dividend income.

Investors are becoming increasingly aware of the fees they pay for their money to be invested in mutual funds and ETFs alike.

Passive ETFs have rapidly grown in popularity because they are, on average, substantially cheaper than their actively managed counterparts.

One of the main reasons why ETFs are cheaper is because they do not need to employ a high-paid research team in an effort to beat a benchmark – they are simply trying to match a benchmark’s performance at the lowest cost possible.

I am not going to beat a dead horse and discuss the merits of investing in low-cost ETFs versus active money managers. In the far majority of cases, I would advocate for the ETF due to the fee savings and generally more dependable performance.

Instead, the focus of this article is on investing in dividend ETFs compared to individual stocks.


The beauty of owning individual stocks is that there are no ongoing fees – you only incur costs when you buy or sell a stock, and trading commissions are generally quite low today (typically $5 to $10 per trade at most discount brokers).

While dividend ETFs trade just like stocks, every ETF charges a recurring fee based on the value of your portfolio.

Many fees charged by ETFs appear rather harmless. Fees generally range from less than 0.1% to 0.5% per year for some of the largest and most popular dividend ETFs.

For small investors, these fees are almost a no-brainer to achieve proper diversification and gain time in the market – a $10,000 account might pay as little as $10 per year.

Investors who don’t want to deal with the hassle of owning individual stocks are also happy to pay the fee and sleep well at night.

However, fee dollars can really begin to add up for larger account sizes over the course of many years.

Suppose an investor had $1.5 million he wanted to invest in dividend stocks to achieve a yield of at least 3.5% with low volatility.

The PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD) seemed to meet his objectives. The ETF has an annual expense rate of 0.3% and offers a dividend yield around 3.5%.

The table below projects his portfolio over 10 years, assuming an annual 4% return from the fund, no reinvestment of dividends (he lives off the income), and a constant 3.4% dividend yield.

In the first year alone, the investor would have seen $4,500 leave his portfolio to pay ETF fees, which amount to about $375 per month.

We can see that over the next decade, his portfolio generated $612,311 of dividend income, but fees ate over $54,000 of that amount.


Put another way, ETF fees consumed close to 9% of his total dividend income over the period – even despite the “low cost” nature of the fund.


Beyond fees, dividend ETFs with high portfolio turnover can also experience lower returns than their benchmarks because of their higher taxes and transaction costs. Owners of individual stocks can avoid these “hidden” costs and potentially generate slightly higher returns by maintaining a buy-and-hold strategy.

Some retirees are fortunate to have portfolios that are significantly larger than the $1.5 million account I used in the example above. As the size of a portfolio grows, fees also rise – a $3 million portfolio would pay over $700 per month in fees during the first year it was invested in the PowerShares S&P 500 High Dividend Low Volatility ETF.


However, some investors with large accounts are happy to pay ETF fees – if they already have enough passive income and aren’t interested in spending any time analyzing stocks, ETF fees are a small price to pay for the time and convenience they provide.

For investors interested in owning funds, let’s take a look at how to identify the best dividend ETFs.

How to Pick Quality Dividend ETFs

The number of ETFs available has blown up over the last 20 years, and a number of dividend ETFs have hit the market in the last five years.

Despite there being more than 100 dividend-focused ETFs in the market, the biggest challenge picking an ETF is finding one that is mostly aligned with your investment objectives (e.g. dividend yield, diversification, volatility).

As I previously discussed as one of the downsides of owning dividend ETFs, it can be difficult to find a low-cost product that meets your current income needs with a high dividend yield while also providing reasonable dividend safety and diversification.

ETF Database provides an ETF screener that contains a number of helpful metrics to help you find a potentially appropriate list of dividend ETFs. Morningstar also offers an ETF screener, but I am not aware of any others.

Once you have identified a handful of relevant ETFs, what should you look for? Aside from your personal preferences (e.g. dividend yield), it’s important to be aware of an ETF’s expense ratio, objective, diversification, turnover, and size. 


As I demonstrated above, even a low expense ratio of 0.3% can really eat into a portfolio’s dividend income stream. My personal preference is to stick with funds with expense ratios no greater than 0.3%.


Many of Vanguard’s products charge fees below 0.1%, which is hard to pass up. The easiest way to maximize your dividend income and performance is to find the lowest cost, best diversified product.

Besides expenses, it is important to review a dividend ETF’s objective. You should be aware of the index an ETF is designed to track and feel comfortable with its selection approach – some ETFs will blindly pick the highest-yielding stocks in a particular group, while others will add in some sort of “quality” filter.


While these factors might not seem important during a bull market, they can make a world of difference during a recession – lower quality ETFs and indexes hold companies that are much more likely to cut their dividends and underperform the market. Unfortunately, there is no easy way to view the most important financial ratios for dividend ETFs since they consist of so many individual dividend-paying stocks.


However, for funds with a long enough history, investors can view their historical dividends paid by calendar year using our website to see how much they cut their dividends during the last recession.


The diversification of an ETF is another factor to consider. Some funds are constructed to be significantly over- or under-weight a sector. For example, the PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD) derives around 20% of its exposure from utility stocks, but less than 1% of the Schwab U.S. Dividend Equity ETF’s (SCHD) holdings are utilities.


Each fund has guidelines to follow as it relates to its maximum exposure to any single sector or stock, and my general preference is for no sector to exceed 25% of the portfolio and no stock to account for more than a 5% weight.


If I am going to invest passively in ETFs, I don’t want to lose sleep over any “active” bets the fund might be taking by not being well-diversified – all it takes is a few large holdings to drag down the entire performance of a fund.


A fund’s turnover is important as well. ETFs with lower portfolio turnover pay less in capital gains taxes and transaction costs, which helps the performance of the fund (and the value of your portfolio) better track its index – especially in taxable accounts. I like to look for ETFs with turnover rates no greater than about 25%.


Finally, the size of an ETF also impacts its risk profile. Of the approximately 1,900 ETFs in the U.S., roughly 400 of them have average trading volume of less than 1,000 shares.

The top 150 ETFs also account for over 90% of overall ETF trading volume. In other words, there are a lot of ETFs that are dangerously small and may not be able to stay in business.

ETFs with very low trading volume are also susceptible to higher volatility and bigger trading gaps when you try to enter or exit a position. As a conservative investor, I avoid ETFs with total assets less than $500 million and prefer funds that have a track record going back at least three years. 


To summarize, here are the ETF characteristics I prefer to see:

  • Fund objective is simple and tracks an understandable index
  • Diversified by sector (no more than 25%) and stocks (no more than 5%)
  • Expense ratio less than 0.3%
  • Portfolio turnover less than 25%
  • Total assets greater than $500 million
  • Fund inception at least three years ago


Investors can research most of this information quickly by simply “Googling” the name of the fund and viewing information directly on its website.

An ETF fund’s website and prospectus will tell you everything you need to know about its expense ratio, total assets under management, portfolio turnover, inception date, objective, and diversification. It usually takes just a few minutes to review this information to see if it meets your criteria.

Similar information on ETFs can also be retrieved from Morningstar, and a fund’s annual dividend history and growth can be retrieved using our website.

Closing Thoughts on Dividend ETFs

Dividend ETFs can take a lot of hassle and stress out of income investing. For investors who don’t mind the fees and have little interest in analyzing individual stocks, dividend ETFs are an attractive option to consider for the peace of mind and time savings alone.

For the rest of us, especially those with larger portfolios living off dividends in retirement, building a high quality portfolio of 20 to 30 individual dividend stocks can save hundreds or even thousands of dollars each month.

More importantly, building a dividend portfolio of stocks allows an investor to completely customize the dividend yield, dividend safety, and diversification of a portfolio to match his or her unique objectives. Managing a portfolio of individual dividend-paying stocks can certainly be a worthwhile endeavor.

Sours: https://www.simplysafedividends.com/intelligent-income/posts/13-dividend-etfs-vs-individual-stocks


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