Dividend Mutual Funds and ETFs
Investing in dividends through mutual funds and ETFs is an appealing choice for many investors. Let’s start with an overview of Mutual Funds and ETFs as there are many similarities between these two vehicles.
What are Mutual Funds and ETFs?
Both mutual funds and ETFs represent a basket of securities like stocks or bonds. They typically track an index, sector, or another asset class. One of the primary benefits of investing in funds is that they offer diversification at a much lower cost than buying individual securities.
Key Differences
Mutual funds are priced daily when the market closes. The price of the assets in the fund are used to determine the mutual fund’s Net Asset Value (NAV). Mutual funds can only be bought or sold at their NAV.
Exchange Traded Funds (ETFs)
ETFs trade on exchange like a stock and can be bought or sold directly through an online brokerage firm. Their ease of trading makes ETFs more efficient and less expensive to trade than mutual funds.
Mutual funds must be purchased directly from the firm that manages it or from an online brokerage firm. They only trade once a day after their NAV has been calculated. Selling mutual funds can present a challenge because you may incur a penalty if you sell it sooner than stated in the prospectus.
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Consider the Expense Ratio
Perhaps the most important difference between ETFs and mutual funds is their expense ratios. The expense ratio is what investors are charged to cover the fund’s annual operating expenses. It is calculated annually and is found in the fund’s prospectus and shareholder reports.
Mutual funds are typically actively managed, meaning they are monitored and traded on a regular basis. While this may seem appealing, keep in mind you are paying for that management. And, moreover, there is no historical data to suggest that actively managed funds consistently outperform passively managed funds.
ETFs are passively managed rather than following active strategy, which reduces their fees and typically allows them to have a significantly lower expense ratio than mutual funds.
Dividend Mutual Funds and ETFs
Now that we have covered the basics of mutual funds and ETFs, let’s look specifically and dividend Mutual Funds and ETFs.
Dividend Mutual Funds and ETFs are invested in dividend paying stocks, or they may track a dividend index like the Dow Jones U.S. Select Dividend Index, or a specific category of stocks like the ProShares S&P 500 Dividend Aristocrats Index. You will usually find that these funds track more mature and established companies that pay a consistent dividend and offer a steady stream of income to investors. Many funds offer the ability for reinvestment like a DRIP if you’d rather reinvest your dividends.
As with any investment, careful evaluation is important, but a dividend fund can be a useful vehicle for generating dividend income.
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