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A dividend ETF, or exchange traded fund, is a type of security that monitors the trend with a particular index fund or commodity and trades just like a stock on an open exchange. The trading price for the security is based on the current value of the assets that are being tracked. Owing to this fact, the actual value of the fund will fluctuate all through the trading day, just like the value of different stocks move up and down during a trading period. Like stocks, a dividend ETF also provides regular payments or dividends to investors, making this particular security worth consideration.
While in many ways a dividend ETF is similar to a mutual fund, in that a basket of assets are tracked and influence the value of the security, there are differences that should be noted. One is that while the net asset value of a mutual fund is calculated on a daily basis, this is usually not the case with this type of exchange traded fund. Depending on the structure of the fund, there may also be some differences in how the ETF is managed or administered. This type of security also exhibits features common to stocks such as the ability to buy on margin, sell short if necessary, and the opportunity to buy a small amount of shares.
The success of a dividend ETF rests on the performance of the assets that are tracked as part of the security’s basket. Here, the concept of asset allocation comes into play. In order to protect the exchange traded fund from losing money during different types of shifts in the marketplace, diversifying the assets tracked is essential. Doing so makes it possible to offset losses with one type of security by gains made with other securities in the basket. When the balance of assets is carefully planned and monitored properly, this helps to produce the best possible dividend payments to investors.
As with different types of stocks, the payments issued on a dividend ETF will be managed with a set schedule. The dividend frequency may be monthly, quarterly, semi-annually or even annually, based on the provisions within the governmental trading regulations that apply. Investors should look closely at the terms and conditions that apply to the specific dividend ETF under consideration and make sure that the frequency of the payments is a good fit for their financial strategies before actually buying shares of the security.
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