Dear fellow readers,
Last week I have been to a masterclass about ETF’s and how it could balance your portfolio. In short, the ETF is just like an index fund but with the possibility to sell them during the day, the ETF’s tries to follow the movement of the index fund and will therefor almost never beat the index fund itself.
ETF’s are a nice way to spread risk for every portfolio, no matter what you are investing in, by investing in an ETF you buy a part in multiple businesses without having to buy them all separately. For example you could buy an S&P 500 ETF which buys a part of every one of the companies in the S&P 500. So far it sounds good… buying just 1 ETF and with this ETF I have risk spread over a total of 500 companies. An upside is that buying and ETF investing is way cheaper than investing in index funds or actively managed funds by fund managers (something a lot of people still do).
But there are downsides, each of the ETF’s have cost involved as a percentage of the amount invested this means that from each euro invested a part will be taken as a fee for the ETF. And we as dividend investors know that every euro that’s paid as a fee cannot be invested again into new dividend generating stocks, a major downside for me.
For example if I invest 10.000 into an ETF that charges 0.3% as a fee then I will lose 30,- each year no matter if the ETF is going to profit me or not. If I’m going to invest in that fund for 10 years I will lose 0.3% on every euro of portfolio net worth every year. That is money I could have better invested in my own set of dividend stocks (at least 300,- gone).
So after the masterclass I asked myself to invest in ETF’s or not? The downside was obvious the costs are higher than passively investing in dividend stocks for this little fee (0.3% in my example) I buy a big spread in multiple funds and while investing in an ETF I also receive the dividend that the companies pay.
ETF’s also have the unique ability to dollar cost average your way into the fund and you could easily use it to invest a part of your savings into. The combination of dividend investing and investing in an dividend yielding ETF sounds good to me. It makes sure that I have a wide spread of stocks (less risky) and that I also have the possibility to dollar cost average my way into it while I can still focus on picking dividend investing stocks with the rest of my savings.
For example I could decide to invest 100, – every month into the ETF but investing 100,- into a dividend growth stock would have a stupidly high cost ratio. That’s why I normally save to invest 1500-2000 at once. The ETF investing strategy is a good strategy for when you do not have a lot of cash available and if you want to buy a widely spread fund that follows a certain index in combination with a relatively low cost basis (still higher then buy and hold dividend investing strategy, but lower than a fund manager). It also offers the ability to dollar cost average your way into the stock market with a little invest of for example 50,- or 100,- a month that way you have a widely spread base, you do not have to manage or do research to pick the best dividend growth stocks which reduces the downside you could face.
IF I would invest in the Vanguard High Dividend Yield ETF I would with my one investment of 100,- invest in 436 different companies that all yield dividends for an average yield of 3,43% with investments in companies like Exxon, Microsoft, Wells Fargo, Johnson & Johnson, General Electric, JPMorgan Chase, AT&T, Pfizer, Procter & Gamble and Verizon and that’s just the top 10 Holdings! And that all for a fee of 0,10%. Another option that sounds good to me is the Vanguard Dividend Appreciation ETF that invests in dividend growth stocks (that raised dividends for at least 10 consecutive years) something I still lack a bit off in my current portfolio!
Conclusion: The ETF Investing sounds as a good option to either reinvest your received dividends in or as an automatic invest gateway where you could dollar cost your way into a global market ETF by investing 50,- or 100,- a month! Building a portfolio starts by saving income. If you invest that income into an ETF it’s an easy way for none experienced investors to put their money to work in this low interest rate environments. For now I’m not going to initiate a position in an ETF yet, I’m first going to do some extra research on which ETF to pick. After that I will probably automatically invest either 50 or 100,- a month and try to keep this position around 5% or max 10% of my portfolio. Of course as a dividend investor I will do research to find an ETF that invests in and pays dividends for many years to come!