ETFs or Exchange-traded funds have emerged on the market in the late 2000s and early 2010s. Since then, they have managed to produce literally hundreds of billions of dollars in different assets. Also, they prompted a broad shift in the market, leading investors towards indexing strategies. One of the amazing things ETFs have done in this short amount of time was to really empower financial advisors, Chief Financial Officers, investment advisors, and retail investors. They were all encouraged to take control of their portfolios, push down the fees, and to simply max tax efficiency. Therefore, if all this sounds good to you and you feel like taking up ETF investment, here are 10 free dividend ETF growth strategy tips you need to know.
#1. Dividend ETFs Don’t Always Mean High Dividend Yields
One of the reasons many people have taken the ETF route is because they seem to be quite an efficient tool if your investing strategy is dividend-orientated. However, for you not to get disappointed, it’s important to mention that not all dividend ETFs will generate significant yields. That is due to how the ETFs are built and maintained. A great number of dividend-focused ETFs highlight the consistency of payouts and not how big the dividend yield is. The Vanguard Dividend Appreciation ETF (VIG A), for example, contains solely companies that have upped their dividends in the past 10 consecutive years. This means that their companies might have low yields.
#2. Cap Matters when It Comes to Size
When investors try to expand on the international market via ETFs, they are faced with a very important decision – should they use ETFs dominated by large caps stocks or the ones that center on small caps? The reason it’s so important is the fact that this will have a fundamental impact on the returns or the profits.
Do ETFs pay dividends? Yes, of course they do. How much? Normally, large cap stocks are a lot more stable and secure, while small cap stocks are much more volatile. On the other hand, the small ones present a far higher appreciation potential as far as the capital goes. Therefore, the real tip here is to make sure you secure as many choices for yourself as possible. Do some research and find out all the potential benefits both small, big and mid-sized cap stocks have.
#3. Not Every Single ETF Is Cheap
One of the main arguments for investing in ETFs that everyone likes to bring to the table is the fact that they are extremely cost efficient. That is, in comparison to the traditional actively managed mutual funds. Another argument traders normally use when it comes to paying is the fact that ETF prices are uniform. However, that is far from the truth. Their prices actually range from 5 basis points to 2.0%, which is the highest. Therefore, in order to minimize your expenses, you need to explore all your options. You might be able to find a cheaper alternative to your original one.
#4. Pay Attention to the Commission Drag in the IRA or 401(k)
This particular tip is in regards to one of ETF’s disadvantages. While they’re very good in some aspects, they are quite the ‘commission drag’ when it comes to using them for retirement accounts. Investors have to pay either a fee or a commission when they purchase ETFs. When you have a retirement account such as an IRA or a 401(k) and you make monthly or by-monthly dividend ETF contributions to it, commissions will add up quickly and massively. 2
#5. There are Commission-Free ETFs
As mentioned above, when you buy or sell ETFs, you need to pay some sort of fee or commission, just like for any other individual stock. But, there are exchange-traded products in the hundreds eligible to be traded free of commission. And that’s over a number of different platforms. For example, both Schwab and Vanguard offer their ETFs for free in brokerage accounts as far as their clients are concerned. This is important because it will lower the expenses maintaining your ETF portfolio requires. Here are some others that have taken to the free alternative as well:
- iShares Global Energy ETF– they offer 30 of their ETFs via Fidelity
- Global X
- WisdomTree – both of these offer commission free ETFs on E*Trade accounts
- TD Ameritrade – they have over 100 ETFs that cover a very large array of asset classes.
#6. Never Go for Market Orders
One thing you may have heard on multiple occasions is that ETFs trade just like normal stocks. And that is, in general, a positive thing. This basically means that investors can make their trades all day long and that they don’t have to wait for the closing bell so that they can in or out of a mutual fund position. However, there are some disadvantages as well. ETFs don’t switch at the NAV of the fund, but rather at whichever price clears the market and matches the buyer with the seller. What does this mean? In laymen’s terms – the fact that you could lose a lot of money on a trade. Placing big market orders to be executed at who-knows-what price is available at that certain moment has the potential of making you buy at a steep premium or sell everything at a discount.
Luckily, here’s a very simple tip – limit your orders so that your final result is not a sour trade.
#7. Always Remember that Physical Gold ETFs Are Taxed Like Collectibles
ETFs normally offer investors tax efficiencies via the nuanced structure of their creation and redemption mechanism. However, there are some tax circumstances and ramifications that may take you by surprise. Gold ETFs that are physically backed can be one of these instances. Some examples include the Gold SPDR (GLD) or iShares COMEX Gold Trust (IAU). This means that, if you expect your gains from these funds to be taxed at a rate the same with long-term capital gains, you might be a little disappointed. Physical gold ETFs are actually taxed like you owned the gold directly. If we were to look at the numbers, this would mean your gains will be taxed at a 28% collectible rate.ure 3
#8. Be Aware of the Fact that ETFs Can Close Down Sometimes
The ETF lineup has indeed grown very much in the past few years. So much so that it now encompasses new products being traded every year in the hundreds. However, just like new products appear every year, they close down too. Normally, ETFs shut down when they cannot generate enough interest from investors anymore and when they drain money from the company that issued them without producing anything in return.
But this is not something you need to be worried about. This process is more like natural selection, where the weak ones that cannot provide for themselves will disappear. What’s even more important to know is that, even though a specific ETF has closed down, that doesn’t mean that your investment fund will disappear too. Normally, when an ETF closes, it will liquidate its portfolio as time goes by and return all the funds it has to its investors at certain dates. These are called ex-dividend dates. Indeed, it might cause you some inconvenience as far as planning and taxes are concerned, but other than that you shouldn’t worry.
#9. Always Do Some Research before You Adopt a Strategy
This last piece of advice is a universal one. You should use it not only when you’re investing in ETFs, but when you’re investing in everything else as well. Use official online resources, rather than shady ones. Etfdb.com, for example, assembled a top 119 of the best dividend ETF to be found out there. It’s also home to the best ETF screener on the web. They have a fact sheet that comprises more than 900 companies as well.ProShares has a list of the S&P 500 Dividend Aristocrats ETF index which you can use. Take a look at the Russell 2000, The PowerShares Dividend Achievers ETFand Global X SuperDividend ETFas well. You can also find testimonials, how-tos, and 101s on many topics. Make sure you read them all. Otherwise you won’t be trading but gambling.
#10. Invest in America with Build America Bond ETFs
The Build America Bonds are a lasting reminder of the 2009 American Recovery and Reinvestment Act. So it’s a good idea to go national and reinvest in our homeland vs. investing in foreign European, Australian or Canadian old or emerging markets. The dividends might be yielding better results that you’d have originally thought. Even though Canada (via the BMO Canadian Dividend ETF) and Europe have good rising ratings, national companies can still be your champions when it comes to investing.
The first ETF was formed in 1993, under the name SPY. Currently, the SPDR S&P 500 (SPY) is an exchange traded fund based in New York. As shown by its name, it matches the price and yield actions of the S&P 500. Since 1993, it has paid dividends quarterly, every single year.