Movies like The Wolf of Wall Street and Boiler Room share a high-speed, thrilling version of what can happen in the world’s financial markets. But for your money, excitement is probably the last thing you should be looking for. Instead of trying to strike it rich on a good stock tip, most people would be far better off taking a more passive approach with a portfolio of ETFs. While there are certain situations where someone may want to invest in individual companies, ETFs offer a laundry list of benefits over a portfolio of individual stocks. If you’re on the fence about how to invest your savings, here are five reasons ETFs are better than single stocks.
ETFs provide instant diversification
When you own a single stock, that investment’s performance is tied to news and financial results surrounding that one company. If you have too much invested in one company, a problem there can be a huge drag on your portfolio. Many workers have lost their retirement savings by investing too much in their own company’s stock and not enough elsewhere. If you own two stocks and one of them has a bad quarter, half of your portfolio is in jeopardy.
An ETF, on the other hand, gives you a basket of many different investments in a single share. For example, an S&P 500 index fund gives you 500 of the biggest US stocks at once. A Russell 2000 ETF gives you 2,000 smaller stocks at once. Other ETFs can hold any combination of stocks, bonds, currencies, real estate, or other assets.
Single stocks are akin to keeping all of your eggs in one basket. ETFs give you a whole bunch of baskets to spread the risk around so that a problem at one company doesn’t scramble the rest of your nest egg.
ETFs offer lower transaction costs
When you buy or sell most investment products, you’ll be met with fees and commissions that eat into your investment gains. If you want a diverse portfolio of stocks, you may end up spending at least $5 for every buy and sell transaction. ETFs give you more assets at a lower cost.
Because they are traded on stock exchanges just like single shares of stock, most brokerage firms charge the same fees to trade ETFs as they do stocks. If you wanted to buy and sell all 500 companies in the S&P 500 as individual stocks, you would need to enter 1,000 trades. With an ETF, you can do it with just two.
Second set of eyes
When picking your own stocks, you are relying solely on your research and timing decisions when buying and selling. With an ETF, you have a fund manager behind the scenes managing the holdings.
While index funds follow market indices with their own rules, many ETFs are run by professional fund managers that focus investments on specific industries or investment themes that take care of the buying and selling so you don’t have to think about it. If you believe in the ETFs you own, you can take a hands-off approach and leave your portfolio on autopilot.
Lower management fees
Some actively managed mutual funds charge between one half percent to 2.5% per year on top of whatever fees you’re paying to your investment advisor, which are often 1%. Fees charged by ETFs average around 0.4%, with some leading passive index funds charging less than 0.1%.
That can be a significant savings. And, every penny you pay in fees is a penny that you can’t invest. As explained in this article about boosting your savings through the power of compounding, those pennies really do add up.
ETFs are easy to buy and sell
When you navigate to an individual stock listing page online, you can find the daily trading volume for that stock. Some companies trade almost constantly during market hours while others only change hands a few times per day. The low-volume stocks can be a problem for some investors because you can’t always sell them when you want.
ETFs trade just like high-volume stocks. That means the ETFs are highly liquid, or easy to sell in an instant. Higher trading frequencies also reduce the risk of things like market manipulation. In any case, owning more liquid investments is better than owning less liquid investments for the typical investor.
ETFs are better than single stocks
The combination of the benefits of ETFs has brought them to the forefront for American investors. The first ETF traded in 1993. In July 2019, the total value of ETFs surpassed $4 trillion for the first time. While ETFs have some detractors, it’s clear that a large number of investors have discovered the power of ETFs.
At Evati, we use an ETF-only approach to deliver the best possible results to investors while minimizing costs. This passes on the benefits of ETFs to every single Evati portfolio. And, Evati charges just $1 per month for accounts up to a $5,000 balance to make investing affordable for everyone.