ETFs are affordable and highly liquid funds compared to other mutual funds. Uniquely, they are a type of fund traded like shares in the stock market, mirroring the performance of an index. While stocks offer dividend payouts, new investors often confuse if an ETF pays dividends.

If you are willing to invest in an exchange-traded fund and wondering whether ETFs pay dividends, his article discusses the functions and features of ETFs, whether they pay dividends and the benefits of investing in ETFs. Read on.

What are exchange-traded funds?

Exchange-traded funds (ETFs) are mutual funds that mirror specific stock market indices. You also have debt ETF like a Liquid ETF or commodity ETFs such as Gold or silver ETFs. An ETF tries to replicate the performance of its corresponding index instead of trying to outperform it.

ETFs, like mutual funds, have a NAV (Net Asset Value) and are managed passively by the asset management company (AMC). A distinguishing feature of ETFs is that investors can trade them in stock markets like shares. Additionally, ETFs are available for trade throughout the trading day. Investors hence require a demat account to invest in ETFs.

Do ETFs pay dividends?

In India, ETFs do not pay dividends to investors. The dividends earned through an ETF investment are re-invested in the ETF. In the United States, however, some exchange-traded funds reward investors with two types of dividends

– qualified and non-qualified.

What are Dividend ETFs?

Dividend ETFs are a distinct category of exchange-traded funds that help investors earn more returns via dividends. Dividend exchange-traded funds invest in stocks that offer high returns, thereby letting investors benefit from high-dividend yields.

What are the advantages of investing in ETFs?

An ETF investment in India can be advantageous for investors in the following ways:

They offer adequate liquidity – ETFs can be traded throughout the day on the stock exchange thus providing adequate liquidity. Investors can diversify their portfolios with an ETF investment –Investors who wish to diversify their portfolio frequently opt for exchange-traded funds. If you intend to invest in a particular sector, you can choose a sectoral ETF that focuses on that sector and diversify your portfolio conveniently.

Passively managed funds – You need not depend on an expert to handpick your investments while investing in an exchange-traded fund. Since ETFs track an underlying index, their expense ratio is lesser, making them cost-effective. ETFs have a lower expense ratio than index mutual funds.

ETFs do not pay dividends in India. Dividends earned via an ETF investment are re-invested back into the ETF. You must analyse the performance of an ETF in the previous few years before investing in it.