How does your money grow in an ETF?
Though ETFs allow investors to gain as stock prices rise and fall, they also benefit from companies that pay dividends. Dividends are a portion of earnings allocated or paid by companies to investors for holding their stock.
Traders and investors can make money from an ETF by selling it at a higher price than what they bought it for. Investors could also receive dividends if they own an ETF that tracks dividend stocks.
Since market prices are ruled by supply and demand, an ETF's market price can diverge from its NAV. If there's heavy demand from buyers, the price of an ETF can increase above its NAV (a premium). Conversely, if there's heavy sell-side pressure, the price can dip below the NAV (a discount).
These ETFs can hold income-generating assets, such as dividend stocks, preferred shares, corporate bonds, real estate investment trusts (REITs) and master limited partnerships (MLPs). They offer the advantage of monthly yields, which may be further enhanced by the use of options such as covered calls.
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
An exchange-traded fund (ETF) includes a basket of securities and trades on an exchange. If the stocks owned by the fund pay dividends, the money is passed along to the investor. Most ETFs pay these dividends quarterly on a pro-rata basis, where payments are based on the number of shares the investor owns.
Since its inception in September 2010, the ETF has provided an average annual return of 13.91%. If you invested $3,600 per year over 40 years with that return less expenses, you'd wind up with over $5.3 million. It would only take an annual investment of $680 for your money to grow to $1 million.
In net asset terms, active ETFs have grown from $112 billion in 2019 to $509 billion in 2023—a 35% five-year compound annual growth rate. ETFs have experienced strong and steady inflows over the decade. Figure 1 shows 2021 established a highwater mark at over $900 billion.
Returns can come from a combination of capital gains—an increase in the price of the stocks your ETF owns—and dividends paid out by those same stocks if you own a stock ETF that focuses on an underlying index. Bond fund ETFs are comprised of holdings of Treasuries or high performing corporate bonds.
Bottom Line. Leveraged ETFs decay due to the compounding effect of daily returns, volatility of the market and the cost of leverage.
What is the downside of ETFs?
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
You can make money from ETFs by trading them. And some ETFs pay out the money the ETF makes to investors. These payments are called distributions.
ETFs are bought and sold just like stocks (through a brokerage house, either by phone or online), and their price can change from second to second. Mutual fund orders can be made during the day, but the actual trade doesn't occur until after the markets close.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
Thankfully, there are some stock ETFs that do pay dividends on a monthly basis. They're definitely in the minority, but there are enough where you can actually build a pretty diversified portfolio using just monthly pay stock ETFs. Whether stock ETFs pay monthly dividends usually comes down to the issuer.
From the investor's perspective, ETF fees are not directly paid like a monthly bill. Instead, they are reflected in a fund's net return. For example, if an ETF expense ratio is 0.10%, and the total return before fees is 9.00%, the net return to the investor is 8.90%.
Dividend-paying exchange-traded funds (ETFs) have been growing in popularity, especially among investors looking for high yields and more stability from their portfolios. As with stocks and many mutual funds, most ETFs pay their dividends quarterly—once every three months.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
How to save $1 million dollars in 5 years?
Saving a million dollars in five years requires an aggressive savings plan. Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate.
One of the most popular ways to turn $500 into $10,000 is by flipping items online. This involves buying items at a low price and then selling them online at a higher price. eBay is a great platform for this, as it has a huge audience and is easy to use.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
| Symbol | Name | 5-Year Return |
|---|---|---|
| VONG | Vanguard Russell 1000 Growth ETF | 18.33% |
| IWF | iShares Russell 1000 Growth ETF | 18.24% |
| QTEC | First Trust NASDAQ-100 Technology Sector Index Fund | 18.12% |
| VUG | Vanguard Growth ETF | 17.86% |
| FUND(TICKER) | EXPENSE RATIO | 10-YEAR RETURN AS OF MARCH 1 |
|---|---|---|
| Invesco QQQ Trust (QQQ) | 0.20% | 17.66% |
| Vanguard Growth ETF (VUG) | 0.04% | 13.97% |
| iShares Russell 1000 Growth ETF (IWF) | 0.19% | 14.66% |
| iShares S&P 500 Growth ETF (IVW) | 0.18% | 13.16% |
