Do ETFs provide greater returns than stocks?
I'm a young investor (20 years old), and I have a question about investing in ETFs. I use Robinhood to invest in individual stocks, but I'm looking to put my money somewhere else to earn a greater rate of return. Will ETFs give me greater returns? If not, what will?
Congratulations for starting to invest at the age of 20! When you choose to invest in ETFs instead of single stocks, you are attempting to capture market return and lower risk in ways that are difficult to achieve with single stocks. Companies are exposed to many risks: business risk, market risk, financial risk, along with other variables. Doing research on stocks can help you understand and minimize some of these, but single stocks have a volatility that is lower when you buy an index. It's a pretty straightforward reason; if you own an index fund of 500 companies, one poor investment choice is buffered by the other 499 positions. If you purchase just the poor choice, nothing protects your loss. Now, this doesn't mean that index funds aren't volatile, and they can lose money, however, they have lower volatility.
As you know, ETFs track indices, so they are typically less volatile than stocks. They might outperform a single stock, but it is unusual that an ETF would hit the "home run" that the right stock choice might. But remember--most investors don't hit home runs. Most portfolio managers don't, either. Consistent singles and doubles lead to long-term investing success. Additionally, ETFs can allow you to purchase riskier asset classes where single stocks might be a very bad idea. These asset classes could include, but wouldn't be limited to, small cap stocks and emerging markets. In riskier asset classes, index funds are likely a much better plan than individual stock selection where research might be difficult to obtain.
Best of luck in your investing! Be Prosperous! Peggy
If you are currently using Robinhood, you understand the ease of use is what attracts young people, but it could also be expensive not from fees since the app is free but from your investment portfolio. An app that allows you to trade in the stock market, with no knowledge, could get more expensive versus paying the fees from an experienced financial advisor. Especially if you are buying individual stocks unless you are spending more time following them.
ETFs would be a good supplement to your individual stocks. You could also look at Unit Investment Trusts since they would give you more diversification in your portfolio and have set terms, usually 12 to 24 months.
The only way to potentially increase your investment returns is by diversifying your portfolio, utilizing an investment discipline, and doing your homework. If you want to increase your return or become more speculative, I would advise using the services of a financial advisor.
Adding ETFs to a portfolio of stocks may or may not increase your overall return. Increasing the performance of your portfolio is dependent on actively managing your portfolio. It is important to identify your investment risk tolerance, your time horizon, and investment goals. It sounds like you are young enough to build a successful portfolio although starting out without any experience and then having to rebuild would not be worth the savings from Robinhood.
It's great that you're looking at investing. I wouldn't focus so much on 'greater returns' though, there is no guarantee of any return other than what you can get in a CD. Everything else involves taking on various degrees of risk.
I would look at ETFs, or mutual funds better still, as ways to own stocks in an intelligent way that removes the risks of any individual company. From there, you have the world of funds to take the amount of risk and potential return exposure.
In an intentional mix of funds, you can own the global markets, with tilts that benefit you as a younger investor to small and value stocks, all across the globe. You have reduced volatility which can lead to better results through smoothing out the ups and downs of any individual stock.
There is not a yes or no answer here. The key is to begin thinking about risk and return as two sides of the same coin, rather than return alone. Remember that chasing higher returns will likely leave you exposed to severe downside loss potential (e.g. Tech stocks in the 1990's).
ETFs are simply made up of a basket of securities (like stocks or bonds), but they do not necessarily provide a better return. Individuals stocks carry more risk because you're completely exposed to the performance of that particular stock. Stock ETFs are usually broadly diversified in a sector or index and are a more cost-efficient way to invest monthly amounts when you're starting to build a portfolio. They should ("should" being the key word) provide a better return over time because of, (1) reduced risk due to diversification and, (2) reduced cost structure. It would be impractical and cost prohibitive to to buy each stock in the S&P 500 index, or even 50 of them, with less than a few hundred thousand dollars. The key question is the size of your portfolio.
As you get to higher investment levels, it might be good to interview money managers and advisors because good ones can provide more effective risk management, tax-efficiency, and planning capabilities than people can do on their own.
Wow, that's a loaded question. But speaking in generalities, ETFs provide diversification into a broad index or sector specific area. So it spreads the risks from any one specific stock. So if you believe a certain sector is going to do well going forward, you could buy what you think the "best" one or two stocks in that sector to give you the most "juice" or returns. But if you are wrong, and that company had specific bad news, it could go down while your thesis was correct and the rest of the sector went up. So you, in effect, diluted your strategy.
What I am saying is that individual stocks generally give you the best opportunity for returns but also carry the greatest risks. it is known a "asymetric" or company specific risks. But both are just a tool to get you where you want to go, and they are NOT mutually exclusive. For instance, at our shop, we are bullish on Amazon (AMZN) over the long term because they are continually stealing market share and growing. So that is a specific company I want to own. Another is Apple (AAPL) for similar reasons although they are more mature and their growth rate is not as robust. But those would be considered two "core" holdings which are ALWAYS subject to change and re-evaluation.
Then for a sector strategy, you should use a sector ETF so as not to dilute your strategy. Finally, you can always have some broad based index funds for broad exposure to follow the primary trend of the market. When the market goes up, 75% of stocks will go up, but when stocks go down, 75% of all stocks go down. So you always need to have an idea where the primary trend is and where we are in the market cycle. You will get occasional surprises, but that is alright. And with the broad index ETFs, it is a great way to dial up and dial down risks with just one or two trades. You sell the index ETFs and then you have raised say 25% to 35% cash quickly. Likewise, you can get fully invested with just one or two trades by re-establishing those index ETFs. This party of the strategy would be based on the primary trend.
Regarding individual stocks, a great book to read is "How to Make Money in Stocks" by William "Bill" O'Neil, the founder of Investor's Business Daily (IBD). It is a great book and he is a self made billionaire by investing and trading stocks. There are many other books I can recommend, but I would start with this one.
What you need it information and knowledge, not products. We put out a short, daily market video newsletter that goes over the current market situation along with a few ideas to research. My two portfolio managers rotate doing the video so you get a slightly different perspective with each, although very similar. It is free and I promise you we won't spam you, send you anything, or reach out to you in any way. We do not solicit our newsletter, followers must reach out to us if they are interested in our services. Just go to www.RevereAsset.com if you would like to sign up.
Glad you are getting started so early. Best of luck, Dan Stewart CFA®