Is it better to invest in stocks or ETFs?
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
A single ETF can contain dozens or hundreds of different stocks, or bonds or almost anything else considered an investable asset. Since ETFs are more diversified, they tend to have a lower risk level than stocks.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
Key Points. Most ETFs are massively weighted to a few companies, so you're not as diversified as you think. Broad market ETFs, like S&P 500 funds, are full of companies that won't be around in 10 years. By investing directly in stocks, you learn about business, and in turn, become a better investor.
For investors who want to get in on the action, the good news is that investing in a fund that tracks the S&P 500 index is an easily accessible strategy. But experts say it also deserves a word of caution: Past performance is not indicative of future returns.
The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.
How many S&P 500 ETFs should I own?
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.
- ProShares Bitcoin Strategy ETF (BITO)
- Invesco QQQ Trust (QQQ)
- Vanguard Information Technology ETF (VGT)
- VanEck Semiconductor ETF (SMH)
- Invesco S&P MidCap Momentum ETF (XMMO)
- SPDR S&P Homebuilders ETF (XHB)
- Invesco S&P 500 GARP ETF (SPGP)
- Vanguard S&P 500 ETF (VOO -0.84%) ...
- Vanguard High Dividend Yield ETF (VYM 0.84%) ...
- Vanguard Real Estate ETF (VNQ 0.48%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT -0.78%) ...
- Consumer Staples Select Sector SPDR Fund (XLP 0.98%)
| Symbol | Name | 5-Year Return |
|---|---|---|
| IUS | Invesco RAFI Strategic US ETF | 14.75% |
| OEF | iShares S&P 100 ETF | 14.73% |
| SPHB | Invesco S&P 500® High Beta ETF | 14.58% |
| SPYG | SPDR Portfolio S&P 500 Growth ETF | 14.40% |
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation. When building a portfolio of ETFs, it is crucial to consider your investment strategy, objectives, and risk tolerance.
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
The bottom line. An investor looking to build a well-diversified portfolio doesn't have to choose between stocks and ETFs. Instead, understanding the different investment options, tax implications and more can help you build a strategy to meet your financial goals.
Is it OK to just invest in ETFs?
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
