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What Is a Dividend ETF?

Dividend ETFs focus on bringing in income through dividend returns. These passively managed funds usually have low expense ratios while providing higher dividend payments than other types of ETFs.

🤔 Understanding dividend ETFs

Dividend ETFs are a type of ETF that focus on gains, specifically by selecting securities that pay dividends to investors. Often, these include common and preferred stocks as well as real estate investment trusts, or REITs. Additionally, these types of ETFs may contain either or both domestic and foreign investments, depending on the underlying index.

Many dividend ETFs are passively managed, which reduces administrative fees and increases returns. Passively managed funds typically follow a particular index to reduce the need for human mediation.

Frequently, fund managers for these ETFs weed out securities from the underlying index that don’t match the funds goals in order to streamline investments. They may also handpick a few securities to add to the fund, such as companies with a history of raising dividends or lower-risk blue chip companies.

Typically, dividend ETFs are recommended for risk-averse, income-oriented investors. The key is to choose funds that also have low expense ratios, which means you lose less of your profit to the fund manager.

What this means for you

Investing with dividends in mind is one of the strategies employed by income-oriented investors. As with all investing strategies, this method employs some risk, but also some unique advantages.

For instance, dividend ETFs are one way to supplement your monthly or annual income. Whether you use this money for immediate needs or to reinvest in your assets, such returns are a big component in why people invest in dividend ETFs.

Additionally, many dividend ETFs have lower expense ratios compared to actively managed funds. This further boosts profits while minimizing liabilities and losses.

Dividend ETFs are also one way for investors to protect themselves in highly volatile markets, as well as low-rate environments. In times of economic instability, ETFs that guarantee dividends – especially those with higher-than-average dividends – provide safe haven against the financial storm.

Furthermore, ETFs of any kind are an excellent way to diversify your portfolio. Purchasing even a single share of an ETF exposes your portfolio to dozens – if not hundreds – of securities in one go. This act alone can help reduce volatility, increase stability, and even the playing field within your portfolio.

However, dividend ETFs are not without their risks. For one, because you’re investing in a pre-determined basket of securities, you end up with a blended yield of whatever’s inside the basket. This means that, if one company increases its dividend while another decreases, you don’t benefit evenly. You’ll receive a blend or an average of the new yields.

Furthermore, not all dividend-paying ETFs generate high returns, especially when inflation and management fees are taken into account. Just because an ETF pays a dividend doesn’t mean that you’ll come out on top every time. The best way to combat this risk is through thorough research of your potential investments. It’s important to look at past performance and holdings as well as current returns. This will give you an idea of how the fund may operate in the future.

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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