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Making money from ETFs is fundamentally similar to making money through mutual fund investments because they function quite similarly — Tamir Zoltovski. Just like mutual funds, the way your ETF makes money rely on the kind of investments it holds.
The ETF is somewhat like a trust fund - it can invest in stocks, bonds, commodities, for example, gold or silver, favored stock, or a well-known index. As an investor, you want to know about all these things. How you make money from an ETF will rely on the fundamental investments of that ETF in due course.
Specifically, if you have a stock ETF that aims at high-dividend stocks, you are expecting to make money from a blend of capital gains (rise in the cost of the stocks your ETF owns) and dividends paid out by those identical stocks.
Similarly, if you have a bond fund ETF, you expect to make money from interest returns. If you have a real estate ETF, you expect to make money from the basic rents, wealth gains on property sales, and service returns generated by the property owned by the REITs wherein the ETF has made an investment.
Learn three things when you are looking to make money with ETFs:
Invest only in ETFs that you understand:
There are several more “extreme” ETFs out there - some that use super advantage and short stocks, some that spend only in countries that are hardly above the third world and others that focus closely on specific sectors or industries. Remember Warren Buffett always says the first rule of making money is never losing money. The second law is to see rule #1. You should be familiar with the exact underlying holdings of each ETF you own and why you have invested in them.
Don't Over Expense:
Generally, this is not a big problem as ETFs are likely to have expenses that are affordable. This remains the reasons they are often preferred for investors who cannot pay for individually managed accounts. That is, a monetary planner, monetary advisor, or DIY investor can cobble mutually a portfolio of sensibly diversified holdings, even picking up things like ETFs that aims at individual sectors or industries for an expenditure ratio of around 0.5% per year.
Keep Long-Term Focus:
Remember, ETFs should earn roughly in-line with their underlying holdings. That means if you are holding an equity exchange-traded fund, you may be subjected to big swings in market value in any given year. For example, if you observe periods like 2018-2019 when your ETF holdings are down 10%, 20%, 40% or more on paper and you haven't handled this, then you have no business investing in these securities. Though no can assure the future will look like the past, in history, the time has ironed out most of that instability, and investors have been well rewarded.
There are several ways investors use to have good income through ETFs, but all you need is thorough knowledge of the markets, the strategy to deal with the risks in case of loss, and the tolerance for not withdrawing your money immediately as long-term investments offers you the best profits. This is not always guaranteed, but in most cases it does.
Ken Karlo urges readers to conduct their own research with due diligence into the company, organization, product or service mentioned in this content.
