ETFs vs Stocks: Which Is Right For You? (2024)

If you are looking to grow your savings over the long term, you may be wondering whether it’s best to invest through equity ETFs or directly into one or more stocks.

When it comes to Canadian stock investors, you may be surprised to learn that roughly only 31% of women in Canada invested in stocks, while 47% of men invested in stocks as of 2021. This is despite stocks being an excellent investment asset class to grow your money over the long term.

In the comparison below, I will go over how ETFs and stocks fare against each other in the following categories:

  • Fees
  • The time needed for research
  • Diversification
  • Performance
  • Trading
  • Information Access

I will go over ETFs vs stocks below to see which one is right for you.

Keeping the Comparison Apples-to-Apples

An exchange-traded fund, or ETF, is a way to invest in a particular underlying asset class. It is considered a pooled investment, meaning that multiple investors are putting their money to work in the same underlying investment.

It would be unfair to compare stocks to ETFs that track investments other than stocks, such as bond ETFs or REIT ETFs. In order to keep the comparison simple, I will be looking specifically at low-cost stock ETFs that could do a good job of replacing an entire stock portfolio.

ETFs vs Stocks: Fees

iShares vs Vanguard: Fees

When comparing two investments, the first category you will generally want to consider is fees. Fees are charged for an investment product regardless of performance (in almost all cases) and can restrict growth severely over the long term if fees are high.

Passive, low-cost stock ETFs are currently offered at very low management expense ratios relative to most other ETFs and other pooled investments (such as mutual funds). The structuring of these ETFs for such a low fee is usually well worth the cost.

ETFs will also sometimes cost fees in the form of trading commissions. Unless you are using a commission-free trading platform (like Wealthsimple Trade), you will have to pay a trading commission both when buying and selling an ETF.

Stocks do not cost investors any management fees, also known as investment product fees. The only cost involved with investing in stocks can come in the form of trading commissions. As I mentioned further above, these trading costs can usually be avoided by using a commission-free discount broker.

You can sign up for commission-free trading at Wealthsimple Trade and take advantage of a $25 signup offer.

Fees verdict – With ETFs also costing management fees in addition to trading commissions, stocks are the clear winners from a fee perspective.

ETFs vs Stocks: The time Needed for Research

Researching the Index Funds that you would like to Purchase

Regardless of whether you are investing in stocks, ETFs, funds, or any other investment, you will want to thoroughly research what you invest in to make sure that it matches your investment goals.

ETFs are fairly simple to research, especially since they are usually offered with one or more sales documents that explain a fund’s strategy as well as what it invests in. In a well-built portfolio, you will want to have a handful of ETFs that cover different sectors or geographies to make sure that you are well-diversified.

Stocks are significantly more time-consuming when it comes to research. A stock represents a tiny ownership percentage in a company, meaning that you will have to be very familiar with it.

If you decide to build a portfolio of several stocks or more, you will have to thoroughly research each company to ensure they are worth investing in.

The time needed for research verdict – With ETFs being much simpler to research and requiring substantially less time, they are the clear winner in this category.

ETFs vs Stocks: Diversification

An investment in one stock represents only owning shares in one company. A stock ETF generally invests in tens, if not hundreds or thousands of underlying stocks. Diversification is extremely important when it comes to investing because it can help to reduce risk over the long term.

Individual stocks can be put together in a portfolio to achieve a good level of diversification. Whether this is worth the time (or not) will depend on each investor’s situation.

A well-diversified portfolio of stocks will include equities across many sectors and geographies. This is almost impossible to build for most investors.

Stock ETFs generally invest in specific sectors or geographies. Investors can also find all-in-one ETFs, which offer much better diversification than something like an S&P 500 Index ETF.

Diversification verdict – Diversification is the main selling point of ETFs when compared to stocks. In this category, exchange-traded funds come out as the clear winners.

ETFs vs Stocks: Performance

Stock Performance

You may think that the performance category would be fairly easy to decide, considering that ETFs charge investors a management fee while stocks do not. This fee drags on long-term investment performance for ETFs.

The reality is that it is extremely difficult to outperform the broad stock market by picking a handful of stocks. An overwhelming percentage of professional money managers underperform the broad stock market, making it extremely difficult for the average investor to do so.

ETFs are able to replicate the performance of one or more broad markets by closely following an index. Popular stock indices that are tracked in Canada include:

  • The S&P/TSX Composite Index
  • The S&P/TSX 60 Index
  • The S&P 500 Index

Investing in one or more low-cost ETFs that passively track stock indices can offer you impressive returns over the long term. Management fees for passive ETFs have been slowly decreasing over time, reducing the amount of drag they have on performance.

The additional diversification that one or more ETFs generally offer versus a handful of stocks is also helpful in reducing risk in tough market environments. This helps with the performance overall by potentially reducing how aggressively your portfolio falls during a recession or correction.

Performance – when it comes to performance, ETFs should have the upper hand over the long term by offering better diversification than most handfuls of stocks. The difficulty in outperforming broader stock markets also makes it likely that low-cost index ETFs will outperform for most investors, making ETFs the winner in this category.

ETFs vs Stocks: Trading

TD E Series vs ETFs: Trading

Trading is also an important category when it comes to comparing stocks and ETFs as long-term investments. In this category, the winner will be decided by the investment that typically requires less trading – as this saves a lot of time and energy for investors.

The trading of both stocks and ETFs is done in the exact same way – both ETFs and stocks are usually listed on a stock exchange. When setting up or liquidating a portfolio, however, you will likely be placing much more trades when dealing with individual stocks rather than a few ETFs.

Over time, you may decide that stocks within a stock portfolio are no longer good investments.

You may also decide that you would like to add one or more based on more recent information. While this is a benefit for investors that want to be more in control of their portfolio, close monitoring can also be considered a drawback.

Stocks that do very well over time may also grow to be a very large portion of your portfolio, especially after compounding. From this perspective, stocks will require more trades than ETFs when it comes to rebalancing.

Passive stock ETFs will typically closely follow a stock index and have little trading activity over the course of a year. This can contrast strongly with a stock portfolio that is constantly being traded to take advantage of information. From a tax perspective, a portfolio with fewer trades will likely lead to fewer taxable gains.

Trading verdict – With ETFs generally reducing the need to trade as much (versus an active stock portfolio), they are the winner in this category.

ETFs vs Stocks: Information Access

Prepare Your Documents and Necessary Information

Information access is much more important when considering investing internationally, particularly in markets where the average investor may not be very knowledgeable.

For diversification benefits, it is usually recommended to have a substantial portion of your portfolio invested in assets that are outside of North America.

When it comes to something like a foreign stock ETF, this will generally track an index with simple rules (i.e. the largest 2000 companies by market cap). It will adjust over time to meet this criterion.

Investing in international stocks blindly can be a huge mistake. Investing in multiple companies that operate in countries across the globe can be very risky when done individually. Problems that you may encounter include:

  • A lack of quality financial statements
  • Unethical business practices
  • The impact of outside forces on your investment (government, etc.)

Information access verdict – With international stocks generally being picked blind by the majority of North American investors (due to a large number of reasons), ETFs come out on top in this category.

Our Final Verdict

Both stocks and ETFs are fantastic ways to grow your wealth over the long term if they are appropriate for your circumstances and risk profile.

Despite ETFs winning across most categories in my comparison, there are key situations in which you may want to consider one over the other.

You will want to invest in ETFs if:

  • You do not have a lot of time available to actively trade or research stocks
  • You want to achieve a superior level of diversification much faster
  • You are targeting a specific region or sector to broadly invest (especially if overseas)

Consider investing in stocks if:

  • You want to have absolute control over your portfolio and over deciding when to buy or sell an asset
  • You want to invest very specifically in a concentrated fashion (although not recommended)
  • You do not want to pay any amount of product fees

When it comes to investment professionals here in Canada, the majority of investment advisors generally opt to invest clients’ money through ETFs as opposed to stock portfolios.

If you are considering researching either stocks or ETFs further, be sure to check out both my guide to the best ETFs in Canada as well as my guide to the best stocks in Canada.

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Read about how he quit his 6-figure salary career to travel the world here.

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