How do you make money with ETFs?

How do you make money with ETFs?

You can make money with exchange-traded funds through capital gains and dividends. ETF share prices may increase making the value of the fund more valuable. Additionally, some ETFs pay distributions known as dividends or cash payments to investors.

Imagine, investing in a well-diversified portfolio with one click. You are making money with exchange traded funds and it couldn’t be simpler.

Exchange-traded funds are probably the easiest ways investors build wealth.

Luckily for you, I’m going to show you how to make money with ETFs. I’ll show you how you get paid, some of the best ETFs, and make the process simple. Investing doesn’t have to be complicated and ETFs are perfect for beginners.

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Can you make money with ETFs?

It is possible to make money with exchange-traded funds. ETFs are a security which trade like stocks on the stock market, but are more diversified than individual stocks. It is easier to make money with an ETF because you are not dependent on the performance of one stock.

You can think about it as taking the guesswork out of investing. I would assume that none of us were taught in school about how to choose individual companies to invest in. Exchange traded funds invest in multiple stocks for a specific fund goal.

When you pick an individual stock, your performance is based on the individual stocks performance. Your portfolio isn’t diversified by picking one individual stock. Some scandal could tank the share price tomorrow and your portfolio would suffer.

Exchange traded funds diversify the process so you don’t have to think about it. You buy one exchange traded fund with a bunch of great companies behind it. Should bad news hit one company in the fund, you would hardly notice because you own other great companies.

So it’s easier to buy great funds like the S&P 500 where you know you’re investing in great and quality companies. Buying the S&P 500 gets you access to the top 500 companies in the US. When the top 500 companies do well, so do you. When the top 500 companies do poorly, so do you.

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How do you make money with ETFs? 

The two ways that exchange-traded funds make money are through capital gains and dividend payments. Share price may increase or decrease over time or you may receive a cash payment. Investors make more money depending on the amount of money invested through compounding returns.

Capital gains are simply increases or decreases in share price. For example, you could buy an exchange traded fund for $100 and sell it next week for $120. You earned $20 worth of capital gains.

Most investors are chasing capital gains. They invest in companies or exchange-traded funds where they believe the price may increase over time.

Some exchange-traded funds will also pay a dividend. A dividend is a cash payment made to investors for holding the share. Some investors choose to focus on dividend paying funds and are known as income investors.

However, what is important is building up your investments. The more money you have invested, the more money you can generate with returns.

For example, you could invest $10,000 in the S&P 500, but a 10% return on investment is only $1,000. However, imagine having $100,000 or even $1,000,000 invested. Now you are generating $10,000 or $100,000 on a 10% return on investment. 

Investors need to realize that the stock market traditionally goes up over time. Therefore, your chances of making money in the stock market are greater if you are a buy-and-hold investor. In other words, you aren’t actively trading your stocks and you intend to hold for years and years. 

How much can you earn from ETFs?

People have earned everything from a few dollars to millions through ETFs. How much you can earn depends on which ETFs you purchase, how many shares you buy, and how long you hold on to them.

There are over 8,500 ETFs worldwide, meaning there are a large variety of dividends and capital gains possibilities. While some people may luck out and see a big jump in their ETFs over a few months, most investors make their money in the long game.

The S&P 500 (such as VOO shares) is often used as the U.S. stock market performance benchmark. The S&P 500 incorporates 500 of the biggest leaders in publicly-traded companies, giving us a good idea of realistic return expectations for ETFs.

Over the last 100 years, the S&P 500 has averaged an annual return rate of between 9% and 10%. Let’s stick to the low end and conclude that you can earn an average 9% return from investing in S&P 500 (or similar) ETFs.

Now, this does not mean you will be earning precisely 9% or 10% per year while investing. This return is the average over the last century, meaning some years had negative returns while others were higher than 10%. For example, below are the return rates from 2015 to 2018.

  • 2015: 1.38%
  • 2016: 11.96%
  • 2017: 21.83%
  • 2018: -4.38%

That’s quite a variety!

Therefore, you risk getting a low or even negative return on your investment if you plan to invest in ETFs for a short time. On the other hand, you’ll be on track for the 9% or 10% average annual return if you can become a buy-and-hold investor.

Can you get rich with ETFs?

Plenty of people make their money by holding ETFs long-term. You can become rich and even become a millionaire through ETFs if you develop an investment plan and stick with it long-term.

So, how do you get rich through ETFs? 

First, you’ll need to determine what “rich” means to you. Would you consider yourself rich if you paid off your monthly bills through your dividends? Or, perhaps you want enough money to buy anything you want, whenever you want.

Once you have a number in mind, you can break down what you need to do to get there. It may be difficult to calculate things like capital gains, but you can always go off of the average 9% benchmark. On the other hand, dividends are determined by the ETFs you decide to buy.

To make it simple, let’s check out a few ways you could make $1 million through ETFs, assuming a 9% average annual return.

  • If you buy $50 of ETFs per week ($200/month), you will have roughly $1,066,164 after 43 years.
  • If you invest $400 monthly into ETFs, you would have over $1 million in 35 years and over $1.6 million in 40 years.
  • A $1 million ETF portfolio would let you retire and pull out a comfortable $40,000/year over the following 25 years.

While investing $400 or even $200 per month may sound like a lot now, there are plenty of ways to bring in the extra money and save for your future. With tons of side-hustles and part-time jobs available (even plenty from home), a few additional work days per year could quickly become your ticket to financial freedom.

Check out this government-created compound interest calculator to play along with some other investment numbers to see how your money can grow over time.

How much should you invest in ETFs per month?

Aim to invest at least 15% of your gross monthly income into investments. However, you should create a target savings amount for retirement and use an investment calculator to establish a monthly investment goal.

Most people will struggle to save 15% of their income when they start investing, and that’s ok. Instead, focus on what amount you can invest and gradually work your way up over time.

To determine how much you need to invest in ETFs every month:

  1. Estimate how much money you want to be saved up for retirement. Factors will include how much you want to travel, inflation, gifts to children, hobbies, etc.
  2. Use an investment calculator and assume a rate of return (e.g. 9%)
  3. Enter your current age and your desired retirement age.
  4. Enter in how much money you already have saved for retirement.
  5. Adjust your monthly contribution amount until you reach your target retirement savings.

Let’s look at two people, Tom and Jill. Both want to retire with $1,000,000 and plan to invest in the S&P 500 to reach their goals. Neither have anything saved for retirement.

Tom is 20 years old and would like to retire at 62. Luckily, Tom is young and only needs to contribute $178 per month at a 9% return on investment to make $1,000,000 by 62.

Jill is 35 years old and would like to retire at 62. Unfortunately, Jill has a later start and will need to contribute $732 to make $1,000,000 by 62.

How to invest in ETFs for beginners

Before depositing your dollars, you’ll need to research ETF performance and choose which ETFs to invest in.

When researching performance, consider which companies the ETF includes, past annual return rates, fees, and dividend yields. The good thing about ETFs is that many encompass hundreds of companies, meaning you don’t need to investigate every single one but can look at the ETF as a whole.

I like to ask myself the following as a litmus test before researching an ETF further:

  1. Does the ETF have a dividend yield?
  2. Has the ETF shown good price appreciation, and am I confident the price will continue to appreciate?
  3. What are the tax implications of investing in an ETF?
  4. Will my initial investment be protected?

Here are some of the best ETFs for beginners to get you started. These have billions of dollars under management, include some of the largest companies on Wall Street, and can be combined to diversify your portfolio.

  • SPY: SPDR S&P 500
  • ITOT: iShares Cope S&P Total U.S. Stock Market
  • VB: Vanguard Small Cap
  • SCHG: Schwab U.S. Large-Cap Growth
  • DVY: iShares Select Dividend
  • VXUS: Vanguard Total International Stock

Make sure you do your research before investing.

Once you have an ETF or a few in mind to buy, you can quickly sign up for an online brokerage account through companies like TD Ameritrade, Fidelity, Charles Schwab, or others. Consider their fees, available options, and additional resources before signing up.

Most of these brokerages have a smartphone app so that you can manage your investments on the go. The app makes it easy to transfer money to and from your bank, invest in stocks or ETFs, and track your performance.

When should you sell an ETF?

It would be best to hold ETFs until you reach your financial goal or are ready to take profits. You should also consider selling to rebalance your portfolio, find a better expense ratio, or if the ETF is underperforming.

1. Your financial goals have been met

One of the most common reasons to sell an ETF is when your financial goals have been met. You are ready to sell your shares to pay for your lifestyle.

Examples of when to sell an ETF include:

  1. You have retired and are ready to live off your portfolio.
  2. Your investments were a place to store money until you could afford a down payment on a house.
  3. You feel confident about your retirement savings and want to take time off to travel.

Now, if your stocks have increased some but not enough to meet your financial goal, you may want to keep them longer. This is called holding. Generally speaking, since the market has historically increased over the last 100 years, the longer you hold ETFs, the better their financial outcome.

For example, someone who purchased SPY – one of the oldest S&P 500 ETFs – in 2000 for around $150 per share and held it until 2020 would have seen it more than double in price to $320 per share. That’s a nice 100% return!

In addition to higher appreciation, if you hold your ETFs for more than one year, they are considered a “long-term hold,” which means you will pay less in taxes on capital gains once you sell them.

2. You want to take profits

A good way to sell at your goal price is through pre-calculated price levels called Take Profit. This is a pending order you can set up ahead of time to sell your stocks when they reach a certain point.

For example, if you buy a stock at $10 and know you want to sell once you’ve made a 25% profit, you could set a Take Profit (T/P for short) at $12.50. Your positions would then automatically close once the stock reaches $12.50, and you would lock in your 25% profit.

3. Rebalancing your portfolio

Rebalancing your portfolio is common, especially when investing in individual stocks. A rebalance is selling off any funds starting to make up too large of a portion of your overall portfolio.

For example, you may be invested in 10 different ETFs with the intention of keeping each ETF at around 10% of your overall portfolio. However, some funds may have better performance than others.

Your top ETF now makes up 20% of your portfolio, while the other 9 ETFs make up less than 10% each.

Some individuals will sell their ETFs and invest in more conservative investments, such as bonds, as they get older.

4. You found a better expense ratio

There are plenty of ETFs which track the same index, such as the S&P 500. However, the fund manager sets the expense ratio or fees associated with buying the ETF. 

For example, you could buy one S&P 500 index fund with an expense ratio of 0.03% and another at 0.65%. Both ETFs track the S&P 500, but the second costs over 21 times as much!

One of the reasons I like Vanguard is because of the company’s low expense ratios. Vanguard does everything they can to keep expenses low, so you can minimize your fees.

5. The ETF is underperforming

Sometimes, you may have purchased an ETF you thought would be a great investment. However, after buying the ETF, you found it wasn’t performing as expected.

In this case, you might sell the underperforming assets and reinvest into another fund that is performing.

Can I sell my ETF anytime?

ETFs can be bought and sold anytime during market hours. Market hours are from 9:30 am to 4:00 pm EST, Monday through Friday, minus nine federal holidays.

You can purchase an ETF and sell it on the same day, although that may not be beneficial when you factor in broker fees or taxes.

To sell your ETF, you can use your online brokerage account or contact your brokerage and place your order. You’ll need to know the name of the stock or ETF and how many shares you plan to sell.

When you place your sell order, it may take a few moments or minutes to process. Before this happens, you will lock in the selling price, so waiting a few minutes shouldn’t affect your final sale.

What are the risks of ETFs?

Many ask themselves, “Are ETFs safer than stocks, or are they a waste of time?” Generally speaking, ETFs are safer than purchasing a single stock because they are diversified by combining multiple companies into one stock. That means if one company tanks, the ETF won’t be completely compromised since the other companies continue.

While this makes ETFs a good investment, they do still trend with the general market. As with any investment, there is always a risk.

The downside to ETFs is that they are best for a buy-and-hold position, meaning the best way to get rich is through long-term holding. Buying and holding ETFs for the long run will bring you annual returns that are much more dependable than individual stocks and day-trading.

You may also get into trouble if you don’t understand the ETF you are buying. As we’ve mentioned, there are many different types of ETFs. You can invest in ETFs which:

  • Track the total stock market
  • Track the S&P 500 or another index
  • Short the market
  • Use leverage or debt to amplify the returns
  • Sell covered calls
  • and so many more options

The riskiest thing you can do as an investor is investing in something you don’t understand. Therefore, it’s important to fully understand the stock or ETF you want to purchase.

Are ETFs good for beginners?

Exchange-traded investing is perfect for the first time and long-term investor because ETFs manage risk through diversification. ETF investing provides a simple buy-and-hold style of investing where novices don’t have to keep up with the stock market. Beginners can simply buy month after month without having to think about their Investments.

Most exchange traded funds are very well diverse. Unlike picking individual stocks, exchange-traded funds are comprised of multiple, if not hundreds or thousands of stocks. Therefore, by buying one individual ETF you are being exposed to multiple stocks.

For example, purchasing a single share of VOO invests your money in the S&P 500. The S&P 500 is made up of the United States top 500 stocks. With the exchange traded fund, I get access to the top 500 stocks without actually having to go out and purchase each stock.

The thing I like most about exchange-traded funds is the simplicity. You should always know what you are investing in before putting money into the stock market. However, exchange-traded funds simplify everything.

Each exchange traded fund has a goal. It is important for you to understand what each fund’s goal is prior to investing. For example, is the fund an income or growth fund?

Although, most investors will start off with something basic like an S&P 500 fund. For many investors, the S&P 500 is enough to get started.

Once you have decided on a core group of exchange-traded funds, all you need to do is buy. You don’t have to keep up with the latest company. You know every time that you invest, which  ETFs you are going to invest in.

It is as simple as saying I have $500 to invest, so I’m buying $500 worth of S&P 500.

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Summary: How do you make money with ETFs?

As you can see, it is possible to make money with exchange-traded funds. As a matter of fact, a lot of people are building wealth everyday by simply buying ETFs. Exchange traded funds trade like stocks, but they are more diverse and take the guesswork out of investing.

You make money with exchange-traded funds through capital gains or dividends. Most investors are looking for share prices to increase, known as capital gains. However, some investors are looking for cash payments called dividends.

The more money you have invested, the easier it is for you to make money. Compounding returns are when your money begins to make you even more money. For example, you make more money having $1,000,000 invested than with $10,000 invested.


John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.