What are the differences between investing in Exchange Traded Funds verses stocks? Let’s discuss…
Ease of Transaction – Most stocks are easy to buy or sell. You can buy them using a broker or an online account. ETFs are just as easy to buy. ETFs are unlike indexes as trading ETFs require a single transaction. So as far as entering the stock market or ETF market, this one is the same.
Transaction Costs – Transaction costs of ETFs are smaller than indexes or mutual funds, but when it comes to stocks, it’s the same. Commissions are based on the number of stocks/ETFs or the value of the stocks/ETFs. Once again the same.
Liquidity – Liquidity is again pretty much the same and is based on how many of the stocks/ETFs exchange hands each trading day. But since there are more stocks to choose from than ETFs, we will say that in general stocks have greater liquidity.Risk / Reward – This can get tricky as any investment can have a different risk beta. However, you can make an argument that an ETF has slightly less risk since it’s a mini-portfolio and therefore slightly diversified, but it really depends on what is in the actual ETF. Then again, with less risk comes less chance of reward, so it all comes down to your risk tolerance. We have to call this one a tie since it’s case-by-case for each investment.
Taxes – Since ETFs and stocks use a single transactions, the capital gain taxes are realized when the fund/equity is sold. A tax advantages of ETFs is that it’s treated like a stock trade on your tax return as opposed to how mutual funds and indexes are handled.
Access to a Sector or Market – To get your foot into an industry, it is best to buy several stocks. Multiple stocks spread the risk. Then you have to figure out which stocks to buy and how many. By buying an industry specific ETF, you get that broad exposure buying an industry sector ETF.
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