Save costs with dividend ETF's
What are dividend ETF's?
Exchange Traded Funds are, like conventional investment funds, special funds that are managed by Fund companies. However, the fund units are not distributed directly by the issuing fund company, but are traded on the stock exchange. Therefore, an ETF, just like a share, can be purchased and sold through a broker. As a rule, ETFs are index funds, as are dividend ETFs. An index fund is a passively managed investment fund that replicates a particular index as closely as possible. This is done either by purchasing identical securities with the same weighting as the target index or by replicating them using swaps. The performance of the index fund runs parallel to the respective index, provided that the index was well replicated.
There are a large number of national and international stock indices that specialize in dividend shares. One of these is the German DivDax, which contains the 15 DAX companies with the highest dividend yields. In a passively structured DivDax fund, these 15 DivDax shares are in the same percentage ratio to each other as in the index. If, for example, the value of the index rises or falls by two percent, the price of the ETF also rises or falls by two percent. The same applies to the synthetically replicated dividends ETF's.
Why investors should invest in dividend ETF's?
Investors who want to invest in shares and are not primarily interested in share price increases, but hope for a solid and steady return, make a good choice with dividend shares and in particular dividend aristocrats. A number of solid equity companies can look back on a long history of dividends paid. Dividends Aristocrats often even on 25 years steadily rising dividend distributions without interruptions. Pursuing a dividend-oriented investment strategy therefore means investing in predominantly profitable and healthy companies, in companies with stable business models. In this way, annual dividend yields of between two and five percent can be generated. Some international stock corporations even pay returns of up to nine percent. In addition, analyses show that reinvested dividends sometimes account for more than 50 percent of share performance. Depending on which dividend index the ETF is based on, it is possible to participate in these long-established and high-yield companies in combination with the advantages of a diversified equity investment. As with traditional funds, the same applies to dividends ETF's that a diversification into several equities is accompanied by a reduction in the total investment risk.
Investors should pay attention to this
As an alternative to dividends ETF's, investors can also choose from traditional actively managed dividend funds. Both forms of investment have their advantages and disadvantages. What is certain is that investment funds that are not actively managed in the long term have only been able to beat an index. Investors usually do well with an index replica. Who sets on an index knows its Investment exactly and must have no fear of individual mistakes of the fund management. A dividend ETF also has advantages over a traditional fund from a cost perspective. Both the issue premium of up to five percent and the high annual management fees are omitted with dividends ETFs. These fees place an enormous burden on the performance of actively managed dividend funds. Since index funds not adjusted are issued during the year, issuing fund companies do not have high manager costs, which have to be recouped through the fees. Therefore, they usually only receive a low annual fee..
However, these missing adjustments are also the big disadvantage of dividend ETFs. An index is only adjusted once a year by the stock exchange. As a result, shares may also be included in an index that were successful in the previous year and also paid high dividends, but are currently in crisis. The prospects for the future for a positive dividend payout of a share value that is already in an index are irrelevant. Even more, because the dividend yield even increases due to the falling share price. A fund manager of an actively managed dividend fund can react to such current crises and remove stocks with sharp price drops from his dividend fund. However, this value remains in an index fund until the company has not paid a adequate dividend and the index has been adjusted by the stock exchange. Against this background, dividend ETFs are particularly suitable for long-term investment strategies. For investors who can sit out such crises and want to profit from the generated returns in the long term.
Returns are not equal to returns
Often, dividend-oriented investment strategies are cited as winning alternative to the low yields on the interest rate market. However, such a comparison is not entirely correct. An investment in equities is always associated with uncalculable and unforeseeable risks. The risks for a dividend ETF increase additionally due to the lack of flexibility of the financial market product. As with all investments in stock markets, the basic principle that no risks, no returns can be generated applies to dividend ETF's as well.