How many dividend ETFs should I invest in?
For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
Dividend-paying ETFs can be a great tool for those looking to increase cash flow and diversify their investments. They offer a simple solution to getting exposure to a specific investing niche — in this case, stocks that pay a regular dividend. You can use those dividends to pad your income as many retirees do.
The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
Investors face substantial risks with all leveraged investment vehicles. However, 3x exchange-traded funds (ETFs) are especially risky because they utilize more leverage in an attempt to achieve higher returns.
Disadvantages. However, dividend ETFs are not without pitfalls. One of the tradeoffs for consistent income and lower risk is frequently a lower potential for growth. Companies that regularly pay out dividends tend to be more conservative in reinvesting profits for expansion.
Symbol | Name | Dividend Yield |
---|---|---|
QRMI | Global X NASDAQ 100 Risk Managed Income ETF | 12.25% |
KBWD | Invesco KBW High Dividend Yield Financial ETF | 12.22% |
SURI | Simplify Propel Opportunities ETF | 12.14% |
EWT | iShares MSCI Taiwan ETF | 11.98% |
Dividend ETFs or Dividend Stocks: Which Is Better? Dividend ETFs can be a good option for investors looking for a low-cost, diversified and reliable source of income from their investments. Dividend stocks may be a better option for investors who prefer to choose their own investments.
What is the downside of owning an ETF?
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.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
However, there are disadvantages of ETFs. They come with fees, can stray from the value of their underlying asset, and (like any investment) come with risks.
Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).
Index Investing With ETFs
Using ETFs to cover the major market sectors, you can quickly and easily assemble a low-cost, broadly diversified index portfolio. With just two or three ETFs, you can create a portfolio that covers nearly the entire equity market and a large portion of the fixed-income market.
The Rule of 40 states that, at scale, the combined value of revenue growth rate and profit margin should exceed 40% for healthy SaaS companies. The Rule of 40 – popularized by Brad Feld – states that an SaaS company's revenue growth rate plus profit margin should be equal to or exceed 40%.
How long should you keep ETFs? It depends on your investment goals and how long you want to stay invested in ETFs. While a long-term ETF holding for more than three years can get you better returns, short-term returns can also be more for some ETFs.
Summary. Investing in the S&P 500 index fund, such as VOO, is a winning long-term strategy. Historical data shows that the market has consistently gone higher despite obstacles and downturns.
Here's a summary of which one to choose:
If you want to own only the biggest and safest stocks, choose VOO. If you want more diversification and exposure to mid-caps and small-caps, choose VTI. If you can't decide, consider simply buying both of them (assuming that commissions are low or free).
S&P 500 index funds will be nearly identical to one another in terms of their performance and their holdings, or the particular stocks held within the fund. Investing in multiple S&P 500 index funds will not necessarily further diversify your portfolio.
Should you hold ETFs long-term?
Finding the best long-term ETFs can help reward you if you buy and hold, allowing you to compound your money over time. Even small differences in returns, just a few percent annually, can create an amazing improvement in your total wealth.
The most volatile stock ETF, Direxion Daily Gold Miners Bear 3x ETF (DUST), has a three-year standard deviation of 125.45 and a three-year average annual return of -44.36%. Naturally, if you look hard enough, you can find stocks with higher risk ratings than members of the blue-chip S&P 500.
The largest high dividend yield ETF is the Schwab U.S. Dividend Equity ETF (SCHD). The Vanguard High Dividend Yield ETF (VYM) is also a popular high dividend yield ETF.
Dividend stocks are one of the few asset classes that really deserve a place in almost every portfolio to some degree. They're a great balance to riskier positions in a portfolio and big durable companies make for great long-term holdings. Dividend ETFs are a great option for this.
Ticker | Fund name | 5-year return |
---|---|---|
SOXX | iShares Semiconductor ETF | 30.19% |
XLK | Technology Select Sector SPDR Fund | 27.00% |
IYW | iShares U.S. Technology ETF | 26.17% |
FTEC | Fidelity MSCI Information Technology Index ETF | 24.94% |
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