Do ETFs provide compound interest? - Seedly
 

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Asked by Anonymous

Asked on 23 Dec 2019

Do ETFs provide compound interest?

Do they provide compound interest? if not then what's the appeal of ETFs?

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Lim Chun Long Jimmy
Lim Chun Long Jimmy, Co-founder at PolicyWoke Pte Ltd
Level 6. Master
Answered on 19 Jan 2020

If one stays invested in ETFs for the long term, with capital gains and dividends if any over time, this investment will give you compounding returns on an annual basis.

Most ETFs consist of a mixture of stocks and/or other asset classes, so the main appeal is diversification from the mixture.

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Bjorn Ng
Bjorn Ng
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Level 9. God of Wisdom
Answered on 18 Jan 2020

If you receive the dividends as cash and do not reinvest, then it does not compound. If you do, then it does. For example, IWDA actually auto reinvests your dividends for you. Counters such as STI ETF do not. But you would have to manually reinvest your dividends by buying more of the stock (more fees btw).

The appeal of ETFs would be to give you a basket of top stocks (subjective) just by buying a single stock. It works for individuals who are looking for a "one-stop diversified solution for the long term".

That said, true compounding lies in a business who is growing their business every single year - the compounding will reflect in their share price!

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Billy Ko
Billy Ko
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Level 7. Grand Master
Answered on 18 Jan 2020

You can reinvest your dividends back to your ETF but you have to do it manually, I don't think ETFs under RSPs offer this service

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If you reinvest, then yes you are compounding your investment.

If you receive dividend and do not reinvest, then the compounding effect is reduced alot.

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Choon Yuan Chan
Choon Yuan Chan
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Top Contributor (Jan)

Level 9. God of Wisdom
Answered on 17 Jan 2020

Etfs appeal is they offer diversification by allowing you to be invested in multiple companies by buying just 1 counter.

They did not compound interest but tend to pay out dividends annually

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Wilson Nid A Break
Wilson Nid A Break
Level 8. Wizard
Answered on 17 Jan 2020

Only accumulating share class ETFs that reinvest dividends automatically. If not, you might need to invest via Robo-advisors which help to automate your reinvestment of dividends

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pat
pat
Level 7. Grand Master
Answered on 17 Jan 2020

They pay coupon so it is not compounded. If you want it to be compounded, you will need to reinvest the amount back.

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I believe you mean do ETFs reinvest dividends. An investment doesn't pay interest. They pay dividends or coupons. And you need to reinvest them to have compounded growth.

So yes, I believe there are accumulating share class ETFs that reinvest dividends automatically. But I hear they are less popular than the usual distributing ones that pay out dividends.

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