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.
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.