What is an ETF vs stock?
Stocks involve physical ownership of the security. ETFs diversify risk by creating a portfolio that can span multiple asset classes, sectors, industries, and security instruments. Mutual funds diversify risk by creating a portfolio that can span multiple asset classes, sectors, industries, and security instruments.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business. Make sure you know what an ETF's current intraday value is as well as the market price of the shares before you buy.
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
A single ETF can contain dozens or hundreds of different stocks, or bonds or almost anything else considered an investable asset. Since ETFs are more diversified, they tend to have a lower risk level than stocks.
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in. An ETF's return is the weighted average of all its holdings.
One of the ways that investors make money from exchange traded funds (ETFs) is through dividends that are paid to the ETF issuer and then paid on to their investors in proportion to the number of shares each holds.
- Invesco QQQ Trust (QQQ)
- Vanguard Information Technology ETF (VGT)
- Invesco AI and Next Gen Software ETF (IGPT)
- MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
- Vanguard U.S. Quality Factor ETF (VFQY)
- WisdomTree Japan Hedged Equity Fund (DXJ)
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
Are ETFs good for beginners?
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
- Trading fees.
- Operating expenses.
- Low trading volume.
- Tracking errors.
- The possibility of less diversification.
- Hidden risks.
- Lack of liquidity.
- Capital gains distributions.
A leveraged ETF uses derivative contracts to magnify the daily gains of an index or benchmark. These funds can offer high returns, but they also come with high risk and expenses. Funds that offer 3x leverage are particularly risky because they require higher leverage to achieve their returns.
- Vanguard S&P 500 ETF (VOO)
- Schwab U.S. Small-Cap ETF (SCHA)
- Invesco QQQ Trust (QQQ)
- Vanguard High Dividend Yield Index ETF (VYM)
- Vanguard Total International Stock ETF (VXUS)
- Vanguard Total World Stock ETF (VT)
- iShares Core U.S. Aggregate Bond ETF (AGG)
Some funds, such as money market funds or certain exchange-traded funds (ETFs), are highly liquid and allow for same-day or next-day withdrawals. On the other hand, certain alternative investment funds or funds with lock-up periods may have limited liquidity, making it difficult to withdraw your money immediately.
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
In contrast, the riskiest ETF in the Morningstar database, ProShares Ultra VIX Short-term Futures Fund (UVXY), has a three-year standard deviation of 132.9. The fund, of course, doesn't invest in stocks. It invests in volatility itself, as measured by the so-called Fear Index: The short-term CBOE VIX index.
ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
Most ETF income is generated by the fund's underlying holdings. Typically, that means dividends from stocks or interest (coupons) from bonds. Dividends: These are a portion of the company's earnings paid out in cash or shares to stockholders on a per-share basis, sometimes to attract investors to buy the stock.
Can ETF go to zero?
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
One way to think about it is every three months taking whatever excess income you can afford to invest – money that you will never need to touch again – and buy ETFs! Buy ETFs when the market is up. Buy ETFs when the market is down.
Symbol | Name | Dividend Yield |
---|---|---|
QRMI | Global X NASDAQ 100 Risk Managed Income ETF | 12.11% |
PEX | ProShares Global Listed Private Equity ETF | 12.08% |
KBWD | Invesco KBW High Dividend Yield Financial ETF | 12.07% |
SOXS | Direxion Daily Semiconductor Bear 3x Shares | 12.04% |
It's possible to live off the income from high-dividend ETFs, but it may take some planning. You can find high-dividend ETFs by analyzing the ETF selection in your brokerage account.
Company | Dividend Yield |
---|---|
Dynex Capital, Inc. (DX) | 12.36% |
International Seaways Inc (INSW) | 11.91% |
Angel Oak Mortgage REIT Inc (AOMR) | 11.83% |
Pennymac Mortgage Investment Trust (PMT) | 10.93% |
References
- https://www.investopedia.com/ask/answers/06/canindexfundsgounder.asp
- https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp
- https://www.fidelity.com/learning-center/investment-products/etf/benefits-of-etfs
- https://www.kiplinger.com/investing/how-to-invest-in-etfs-for-beginners
- https://www.investopedia.com/ask/answers/163.asp
- https://support.wealthfront.com/hc/en-us/articles/8353309811348-When-an-ETF-is-delisted
- https://www.getsmarteraboutmoney.ca/learning-path/etfs/how-exchange-traded-funds-etfs-work/
- https://money.usnews.com/investing/articles/high-yield-etfs
- https://www.investopedia.com/ask/answers/052815/does-etf-pay-out-full-dividend-comes-stocks-held-etf.asp
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://www.investopedia.com/articles/investing/020116/when-right-time-change-mutual-funds-etfs.asp
- https://fortune.com/recommends/investing/investing-during-a-recession/
- https://etfdb.com/compare/dividend-yield/
- https://www.etf.com/etf-education-center/etf-basics/why-do-leveraged-etfs-decay
- https://money.usnews.com/investing/articles/best-etfs-to-buy-for-long-term-investors
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://www.schwab.com/learn/story/what-happens-if-your-etf-closes
- https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp
- https://www.schwab.com/learn/story/generating-income-with-etfs-what-you-need-to-know
- https://www.foxbusiness.com/personal-finance/etfs-your-portfolio-experts-weigh-in-what-percentage-to-own
- https://www.schwab.com/learn/story/etfs-and-taxes-what-you-need-to-know
- https://time.com/personal-finance/article/how-to-invest-in-index-funds/
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.nerdwallet.com/article/investing/high-dividend-etfs
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://etfdb.com/compare/market-cap/
- https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp
- https://www.investopedia.com/articles/etfs-mutual-funds/061416/biggest-etf-risks.asp
- https://www.investopedia.com/investing/monthly-dividend-etfs/
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://seekingalpha.com/article/4203362-all-leveraged-etfs-go-to-zero
- https://www.vanguard.com.au/personal/learn/smart-investing/etfs/etfs-how-to-get-started
- https://www.trackinsight.com/en/education/what-happens-if-etf-shuts-down
- https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp
- https://finance.yahoo.com/news/beginner-invest-stocks-start-etf-121300990.html
- https://www.blackrock.com/us/individual/education/closed-end-funds/insights/reasons-to-use-closed-end-funds
- https://biz.libretexts.org/Bookshelves/Finance/Introduction_to_Investments_(Paiano)/01%3A_Chapter_1/02%3A_Mutual_Funds-_Investments_for_the_Masses/2.04%3A_Open-end_Closed-end_and_Exchange-Traded_Funds_(ETFs)
- https://www.investopedia.com/ask/answers/09/etfs-vs-mutual-funds.asp
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.fool.com/investing/how-to-invest/index-funds/safest-index-funds/
- https://www.ici.org/faqs/faq/etfs/faqs_etfs
- https://etfdb.com/compare/highest-5-year-returns/
- https://time.com/personal-finance/article/stocks-vs-etfs/
- https://vericrestprivatewealth.com/leveraged-etf.php
- https://www.bankrate.com/investing/mutual-fund-vs-etf-which-is-better/
- https://financialpost.com/financial-times/mutual-fund-100-is-it-becoming-obsolete
- https://www.quora.com/What-happens-to-your-ETFs-if-your-ETF-invested-company-goes-bankrupt-Do-you-lose-all-your-money-invested-in-your-ETFs-to-the-company-s-bankruptcy
- https://www.bankrate.com/investing/stocks-vs-etfs/
- https://www.nirmalbang.com/knowledge-center/etf-vs-mutual-funds.html
- https://www.morningstar.hk/hk/news/119201/four-simple-rules-when-buying-(or-selling)-an-etf.aspx
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-liquidity.asp
- https://www.cnbc.com/select/what-are-etfs-should-you-invest/
- https://www.livemint.com/money/personal-finance/what-are-the-benefits-and-limitations-of-investing-in-exchange-traded-funds-mintgenie-explains-11704286809054.html
- https://groww.in/blog/what-happens-when-a-stock-is-delisted
- https://www.etf.com/etf-education-center/etf-basics/what-risks-are-there-in-etfs
- https://money.usnews.com/investing/articles/best-vanguard-etfs-to-buy
- https://www.ici.org/faqs/faq/other/faqs_closed_end
- https://www.bankrate.com/investing/low-risk-investments/
- https://investor.vanguard.com/investor-resources-education/retirement/planning-reach-your-goal
- https://www.investmentnews.com/industry-news/news/think-your-stock-fund-is-risky-try-these-etfs-66496
- https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/funds/exchange-traded-funds-for-dummies-cheat-sheet-208448/
- https://www.fidelity.com/learning-center/trading-investing/trading/trading-differences-mutual-funds-stocks-etfs
- https://www.investopedia.com/ask/answers/052615/what-difference-between-exchange-traded-funds-etfs-and-closed-end-funds.asp
- https://www.quora.com/Can-you-lose-all-your-money-from-investing-in-ETFs-even-if-you-dont-sell-your-position
- https://curvo.eu/article/etf-risk
- https://www.livemint.com/money/personal-finance/5-top-performing-large-cap-mutual-funds-in-the-past-10-years-11697191429395.html
- https://finance.yahoo.com/news/etf-closures-hit-3-high-004715407.html
- https://www.securities-administrators.ca/investor-tools/understanding-your-investments/etf-facts/
- https://www.nerdwallet.com/article/investing/what-is-an-etf
- https://www.investopedia.com/articles/mutualfund/09/mutual-fund-liquidation.asp
- https://www.investopedia.com/ask/answers/033015/whats-difference-between-index-fund-and-etf.asp
- https://www.investopedia.com/articles/investing/041615/6-etfs-are-recessionproof.asp
- https://www.etf.com/etf-education-center/etf-basics/managing-and-avoiding-etf-closures
- https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://money.usnews.com/investing/articles/best-etfs-to-buy
- https://finance.yahoo.com/news/trading-halts-impact-etfs-161500552.html
- https://fastercapital.com/topics/can-you-withdraw-your-money-from-an-investment-fund-at-any-time.html
- https://www.trackinsight.com/en/education/how-many-etfs-should-you-own
- https://www.titan.com/articles/etf-drawbacks
- https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp
- https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp
- https://www.nerdwallet.com/article/investing/how-to-invest-dividend-stocks
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.investopedia.com/ask/answers/how-can-i-buy-sp-500-fund/