ETFs (Exchange-Traded Funds) make money in two main ways:
Price Growth (Capital Gains) – The ETF’s price increases over time.
Dividends – Some ETFs pay investors a portion of the profits from the stocks they hold.
Many people wonder: What is the difference between dividends and profit in ETFs? How do you receive your earnings? Let’s break it down in a simple way.
1. Capital Gains: Earning Money When the ETF Price Goes Up
🔹 What is capital gain?
- If you buy an ETF at $50 and later sell it at $70, you make a $20 profit per share.
- This profit is called capital gain because it comes from the increase in price.
🔹 How do you receive capital gains?
- You only get the money when you sell the ETF at a higher price than you bought it for.
- If you don’t sell, your profit is just on paper (unrealized gain).
📌 Important:
- The price of an ETF goes up when the stocks inside it perform well.
- Growth ETFs, like QQQ (Nasdaq-100 ETF), usually focus on capital gains and do not pay dividends.
2. Dividends: Passive Income from ETFs
🔹 What is a dividend?
- Some companies share their profits with investors by paying dividends.
- ETFs that hold dividend-paying stocks collect these dividends and pay them to ETF investors.
🔹 How do you receive dividends from an ETF?
- If the ETF pays dividends, you will get cash deposited into your brokerage account.
- Most ETFs pay dividends every 3 months (quarterly), but some pay monthly or yearly.
📌 Example:
- You own 100 shares of an ETF that pays $1 per share in dividends per year.
- You will receive $100 per year in dividends (100 shares × $1).
🔹 Types of Dividend ETFs:
High Dividend ETFs – Focus on stocks that pay high dividends. Example: VYM (Vanguard High Dividend Yield ETF).
Dividend Growth ETFs – Hold stocks that increase dividends over time. Example: VIG (Vanguard Dividend Appreciation ETF).
3. Do All ETFs Pay Dividends?
❌ No. Not all ETFs pay dividends.
✅ Dividend ETFs – Pay dividends to investors regularly.
❌ Growth ETFs – Do not pay dividends; they reinvest earnings to grow faster.
👉 If an ETF does not pay dividends, your only way to make money is by selling it at a higher price.
4. How Can You Receive ETF Profits?
ETF TypeHow You Make MoneyWhen You Receive It
| Growth ETF (e.g., QQQ, SPY) | Higher ETF price (Capital Gains) | When you sell it |
| Dividend ETF (e.g., VYM, SCHD) | Dividend payments | Quarterly, monthly, or yearly |
| Mixed ETFs | Both price growth & dividends | Capital gains when sold, dividends regularly |
5. What If You Don’t Want to Receive Cash Dividends?
If you want to automatically reinvest your dividends instead of receiving cash, you can use a DRIP (Dividend Reinvestment Plan).
🔹 How DRIP Works:
- Instead of receiving cash, your dividends are used to buy more ETF shares.
- This helps you grow your investment over time.
Conclusion: How Do ETFs Generate Profit?
✅ Capital Gains – The ETF price goes up, and you sell it for a profit.
✅ Dividends – The ETF pays you a portion of its earnings.
✅ Not all ETFs pay dividends – Growth ETFs focus on price increases, while dividend ETFs pay cash regularly.
Hope this explanation helps! Let me know if you have more questions. 😊