The Showdown: ETFs vs. Stocks

The Showdown: ETFs vs. Stocks

Tony Zabiegala, Chief Operations Officer and Senior Wealth Advisor

With over $507 billion in inflows, 2020 will go down as a record year for exchange traded funds (ETFs). To put things into perspective, 2019 saw about $326 billion in inflows.

While there is no denying ETFs are gaining in popularity, how can you tell if they’re the right investment for your portfolio?

In this post, we run through the pros and cons of investing in ETFs versus individual stocks.

• • ETF pros: ETFs have many advantages, including cost. For the most part, they are relatively inexpensive, especially as compared to investments in hedge or private equity funds. Further, they often provide diversification to a wide range of individual investments. There is also a very low-point-of-entry, meaning there is no investment minimum outside of the share price. In addition, ETFs – or ETF-like vehicles – can also be effective when investing in relatively nascent markets, such as electric vehicles or cryptocurrency, where it’s difficult to hand-pick the best stocks.

• • ETF cons: While diversification is often heralded as a prime benefit of ETFs, it can also be a negative in that you’re getting exposure to both the market winners and losers. Moreover, with ETFs, you’re forgoing concentrated exposure to specific, high-conviction stocks.

• • Individual stock pros: The most significant benefit associated with investing in individual stocks is just that — investing in individual stocks. In doing so, you can make concentrated buys in your highest-conviction ideas (and pick winners), without the risk of diluting your gains (holding the losers or underperformers) across an index of stocks like you would with ETFs.

• Individual stock cons: On the other hand, it’s important to note that your conviction plays can back-fire. Diversity across your investments is often a good thing. Investing in individual stocks requires a lot of research and diligence in order to be successful.

At Strategic Wealth Partners, we use a blend of both ETFs and individual stocks in our client portfolios. When it comes to selecting stocks, we focus on companies that offer both a favorable entry point and a good story, suggesting growth ahead. We often turn to ETFs for exposure to both the bond and international markets due to their complexity.

When it comes to your investment portfolio, using individual stocks or ETFs depends on your personal financial situation. If you’re new to investing, ETFs can be a great tool to get exposure to a wide variety of sectors. However, if you are a high-net-worth individual, a more customized portfolio may be better suited to your needs.

If you have any questions about positioning your portfolio based on the information discussed above, please reach out to set up a conversation to discuss your specific situation.