By Leslie Albrecht
Some compare ETFs to surgical instruments, others say they are investment junk food.
Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh your financial decisions. Our columnist will give her verdict. Let us know if you think she’s right in the comments. And please share your suggestions for future Financial Face-off columns by emailing our columnist at firstname.lastname@example.org.
Inflation is stuck in overdrive, a potential recession looms over our heads, and the Dow Jones Industrial Average and S&P 500 have both plunged this year. Many people naturally feel nervous about their finances.
Some may look at their investments through a lens of uncertainty, wondering if they should change things. A recurring question that some ask: is it better to choose and buy individual stocks or to buy shares of an exchange-traded fund (ETF)?
why is it important
Investing is one of the ways Americans create wealth. The choices we make in this area can have serious long-term consequences – for example, on the amount of money we can save for retirement.
Individual stock picking allows investors to identify companies and decide to buy a portion of them that they believe will perform well. ETFs, on the other hand, can allow investors to acquire a share of several companies at once. An ETF is a basket of securities; it can include stocks, bonds, commodities, currencies. They are similar to mutual funds because they are made up of groups of securities. But ETFs differ from mutual funds because their shares can be traded throughout the trading day, while mutual funds trade at the end of the day.
ETFs tend to have lower fees than mutual funds, although “the gap is closing” according to Investopedia, and ETFs are also generally more tax-efficient than mutual funds because they have tend to generate fewer “taxable events,” according to TurboTax.
Why put all your eggs in one basket when you can have a whole basket of broths? Who has the time to research and then monitor individual businesses? Hasn’t history shown that stock pickers underperform index investing?
“There’s so much research on how the average investor really has bad timing, because they’re caught up in the euphoria,” said Greg Plechner, partner and wealth manager at Greenspring Advisors in Paramus, NJ. “They want to buy Peloton (PTON), they want to buy Tesla (TSLA), and when the market turns, they’re the ones holding the bag.” ETFs give you immediate diversification and can ease the pain of holding just one or two stocks straight, he said.
They are also very effective. When people think of the stock market these days, they usually think of the S&P 500, or the 500 largest publicly traded companies in the United States. If you wanted to invest in all of those companies, of course, you could theoretically buy or ask your financial adviser to buy each of those stocks, Plechner said. But that wouldn’t be effective. “By having an ETF, you can make a trade and effectively get the same result as the 500 individual buy orders you would have to place,” Plechner noted.
Some people argue that investors have more control when they own individual stocks, Plechner said. It is true, but this control involves more risks. For example, if you buy Twitter (TWTR) stock because you think the deal to acquire Elon Musk is going to happen, you might be rewarded with a big return, but if you’re wrong, you’ll get a big return. good loss. “When you invest in ETFs, you eliminate single-stock risk,” Plechner said.
If you invest in an ETF and a company in the fund starts to lag – say a company like Peloton, which this time last year was at $96 and most recently traded at less than $8 – you’re not going to get wiped out by having too much exposure to a single stock, he said. “In investing it’s something that’s desirable, that problem investment doesn’t wipe out all of your holdings,” Plechner said.
ETFs can also save investors time and effort. They offer “broad exposure to market indices and/or sectors for investors who do not have the time, desire and/or expertise to conduct fundamental research themselves,” said Steven K. Wilkes. , Chartered Financial Analyst at Hutchinson Capital. Management, a fee-based financial planning and investment management firm in San Rafael, California.
ETFs also allow investors to diversify with agility, said David Marshall, ETF Model Portfolio Strategist at State Street Global Advisors. “When considering using ETFs, the first thing to keep in mind is their effectiveness,” Marshall told MarketWatch. They combine the advantages of mutual funds (by providing a portfolio) with the advantages of stocks, as they can be traded at any time, he said. “If you want to change the complexion of your portfolio, you can do it with the right ETF. I liken them to surgical instruments,” Marshall said.
Is my verdict the best for you?
On the other hand, while some ETFs are index funds that track the broad market, some can be very narrowly targeted, which can make them as potentially risky as owning just a few individual stocks, some observers say. And the ability to trade frequently isn’t necessarily a good thing.
Some thematic ETFs track societal trends: one focuses on the obesity epidemic, another tracks the most talked about stocks on social media. There are even single-stock ETFs, which some have called “day trading tools” that should only be used by knowledgeable investors. There are plans for an inverse ETF that will bet against the stock picks of CNBC’s “Mad Money” host Jim Cramer.
Indulge too much in these quirky ETFs and your investment portfolio may go from a well-balanced meal to a cheat day where you binge-eat fried chicken, MarketWatch columnist Mitch Tuchman previously wrote.
“Like individual stocks, there are thousands of ETFs in the investment universe, so making investment decisions may not be as simple and straightforward as one might think,” Wilkes said.
An argument in favor of stock-picking: some people enjoy making investment decisions. If you read MarketWatch, chances are you follow markets and companies quite closely. If you like poring over earnings reports and 10-Ks, owning individual stocks might be a good option, as you may prefer to be a highly committed investor. As Motley Fool pointed out, one of the reasons for choosing your own stocks is that they tell you about the business, which makes you a better investor.
But what is a “better” investor? Warren Buffett said, “You don’t have to be right about thousands and thousands and thousands of companies, you only have to be right about a few.” This observation may give you the idea that a few good stock picks will send you on the path to billions. But Buffett’s wealth comes more from the longevity of his investments than from his prowess as an “oracle.”
Let us know in the comments which option should win in this financial head-to-head. If you have ideas for future Financial Face-off columns, email me at email@example.com.
See also: MarketWatch reporters debated Financial Face-off topics, including ETFs vs. stocks, live at our Best New Ideas in Money Festival
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