You have the potential to make money with
ETFs
in the same ways you make money with individual equities — though of course there is no guarantee that your investment will provide a positive return, especially in the short term. You may buy-and-hold ETFs, just as you might a certain stock. Or you may trade ETFs to capitalize on shorter-term strength in a particular
sector.
If you own shares of ETFs linked to indexes that track dividend-paying stocks or interest-paying bonds, you receive that income in cash unless you hold the ETF in a tax-deferred account. You may choose to reinvest those earnings. However, you'll pay a commission on every trade unless there's a special reinvestment feature in your account.
If you sell your shares in the marketplace for more than you paid to buy them, you realize a
capital gain.
You can use the principal plus profit to make an additional investment, or for any other purpose. If you've owned the ETF for more than a year, any capital gain is taxed at the long-term rate, which is lower than the rate you pay on your regular income. Income from
qualifying dividends
is also taxed at the long-term capital gains rate.
You may also profit from selling ETFs short if you're correct in your assessment that the market in general or the market for a particular type of security is falling. But you should be aware that short sales are not always possible, especially with smaller or thinly traded ETFs. Similarly, you may benefit from selling
options
on your ETFs in certain market environments, especially if the options remain
out of the money
and you're not required to buy or sell the underlying ETF because the option holder exercises the option.
