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What is an ETF and does it pay dividends?

ETF stands for an exchange-traded fund, which essentially offers a way to invest in a wide range of shares or bonds using a single ticker and listing. An ETF usually tracks a single market, for instance, the FTSE 100 or NASDAQ. But why should you consider investing in one and do you earn dividends?

An exchange-traded fund (ETF) is very similar to mutual funds, but are traded throughout the day and are listed on exchanges. These are collections of securities in the form of stocks, allowing one to purchase shares in an ETF, which corresponds to owning shares in various holdings.

An ETF like the iShares NASDAQ 100 is well worth considering. This ETF covers the top companies on the NASDAQ exchange, including Apple, Microsoft, and Amazon. Instead of buying say 0.5 shares in each company, you could purchase one or more shares of the ETF and spread your coverage over the included holdings.

An ETF is managed and so having shares in a fund incurs an administration charge. It’s usually a small amount and is automatically deducted from the net asset value (NAV). If the management fee for a fund worth £1,000 is 0.75%. You’d see a reduction in the total amount invested by that amount. So at the end of the year, it’ll be £992.50.

The more money you have invested means more fees will be deducted. So long as the ETF you choose is performing well and you receive dividend payouts, you’ll be able to eat up charges and then some.

Who is an ETF for?

An ETF is perfect for anyone who wants to have a diversified portfolio, without having to buy each stock. If you want to own numerous stocks in the FTSE 100 market, for example, you could buy each stock individually. Or you could invest a certain amount in an ETF, which would then spread that amount across its holdings.

This can also prove useful if you don’t want to spend time researching companies. Managed ETFs also update their holdings, which then affect your portfolio. For instance, if investing in a dividend-focused ETF and a company cuts its dividend completely, the ETF may drop that stock and replace it with something else.

Do you earn dividends with an ETF?

You can earn dividends with an ETF. Should an ETF contain companies that pay out a regular dividend payment, this fund can transfer the said proceeds to your brokerage account. If the managed fund decides to, however, it can use the proceeds to automatically reinvest into the fund.

If you’d like the track your dividend payments and stock holdings using Google Sheets, may I suggest you give my dividend tracker a try?

By Rich Edmonds

Rich creates content for the top Windows-focused publication, but by night he tries to make his money work for him and rambles far too much here.

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