Stocks vs. ETFs – Case Study

Do you love stocks over ETFs or is it the other way around? Or do you prefer a mix of stocks and ETFs with a certain percent allocation? Again, Canadian or US stocks, what about the exchange rates? 

What are stocks? Stocks represent the individual companies trading at the stock exchanges – TSX (Toronto), NASDAQ (US), NYSE (US), Down Jones (US) etc are a couple of examples.

Stock ticker prices go up and down based on the demand to buy or sell, the price varies every trading day – Monday to Friday unless the exchange is off. Stock Brokers such as Questrade and TD Ameritrade will charge you a fixed fee to buy/sell stocks. Of course with Robinhood and Wealthsimple trade around, you can trade stocks without spending a dime on commissions.

When it comes to ETFs – ETFs are a pool of stocks, usually within a sector or can be multiple.

For Example – Consider the S&P 500 Index Fund. Now, this index ETF holds stocks from the 500 largest US companies based on the market cap. S&P 500 index is based on a committee that decides on which stocks and companies need to be part of the S&P 500 Index. The ETFs which represent the S&P 500 should hold all of the stocks in the underlying index.

Finally, ETFs are associated with Management and MER fees. The lower the fee the better overall returns you can get. 

So that was the basics on Stocks vs. ETFs. Let’s continue. 

Before we continue, the mindset that I Invest my money is pretty clear:

  1. I will only invest in good reputable US and Canadian blue-chip companies with excellent growth record. I do not like companies with mediocre growth rates and flat lines even with an 8% dividend. That’s not what I am here for. Dividend income is more for retirees, right now you need to concentrate more on growing your money and picking the right stocks. 

  2. Invest small but be consistent.  Buy more on lows and wait on highs. Buy mostly on red days. FOMO logic 🙂

  3. On this blog, to cater to a larger audience, even though I have extensively covered the best Canadian online banks such as EQ and Tangerine, the interest rates here are a mere 2% at the max. I do prefer these banks may be to park my money for the emergency or rather leave it in my CIBC chequing account and invest later. (not the emergency funds, of course, rest of the pool)

  4. I personally prefer investing in stocks over ETFs ( Reasons will explain with proof)

  5. Finally, never have the average people’s mindset while investing, I’ll cover about this too. Keep reading. 

stocks vs etfs

Pros of Investing In Stocks over ETF’s: 

  1. With stocks, you’ll be investing in reputable blue-chip companies (at least in my case and not some get rich quick penny stocks like how KOADK did recently, which can be extremely volatile). Some of the best blue chips are Apple, Amazon, Microsoft, Google, Facebook, NVIDIA, AMD, Netflix, TESLA. Always aim to invest for 3-5 years at least and invest the money you don’t require whatsoever during this time frame. Remember the investment mantra, the longer you invest with blue chips the better it is for you. 

  2. By Investing in the above said blue-chip companies or whichever blue chips you prefer to, you are buying a part of the company which are the dominant forces delivering quarter after quarter standout results. Take for example Amazon. Today the price of apple may be at $490 per share. It may sound expensive to you. But think about this after the 4-for-1 stock split, Apple stock price will eventually fall to $125 around per share. I can bet in a couple of years it will run back to $490 per share and you’ll end up having 4X more shares and hence the profits and growth. So whether you prefer to buy Apple stock today or after the split doesn’t really matter, coz the company and fundamentals are strong and amazing. The fundamental business plan here is good. 

  3. In continuation of point#2, it’s never a wait to invest in blue chips. There can be market drops or crashes, but eventually, the prices will rise resulting in double-digit annual growth in the stock prices. It’s never a wait and watch in the investing world over the long term (5 years at least) 

  4. ETFs even though are safer when compared to stocks, you can’t really expect the same returns that Apple or Microsoft returns, coz with ETFs it’s a big pool of 100s of stocks and hence the returns are far less. Instead, my logic is to pick the stocks carefully and rather invest in those that can perform the best for me. 

  5. Blue-chip stocks never fail to deliver. NEVER!

  6. Unless you are nearing retirement,  investing in good growth stocks should be your prime motive and not ETFs unless you are really scared for whatever the reasons. Bonds are good options too! 

  7. Investing in 5-6 stocks are sufficient, switch over the stocks that are not performing well and allocate funds accordingly. The preference and choices are numerous but always know the companies in and out, do not trust anyone in this. 

  8. I will rather pick a stock knowing everything about it rather than blindly invest in an ETF which is a big pool of 100 stocks which I cannot track individually. The lazy mindset of investments doesn’t work always, I need to understand what I am doing before I do anything. At the end of the day, I want my every dollar to grow in the right direction. 

Pros of Investing in ETFs:

  1. ETFs are a big pool of stocks from different sectors. So, your mindset is more relaxed and you should be satisfied with the returns they produce through diversification. 

  2. S&P 500 ETFs are the best in the market and considered the benchmark often for returns. Examples – ZSP, VFV etc

  3. You need to consider the Management Fee and MER rates before investing in any ETF as it eats up your money over time. 

  4. If your investment mindset in conversative you can consider bonds as well with ETFs. It’s much safer and sound. 

  5. ETFs trade just like stocks in the open market and prices will vary every trading day. 

My personal view on why stocks are always better than the best of the best ETFs: 

The price of ETFs might be less today, so are the returns. 

Consider the below example of NVIDIA and AMD returns vs ZSP Or VFV:

1.  SPY is one of the best S&P 500 Index fund in the market. When you compare its market returns for something similar to Amazon, it’s nowhere close. I would rather invest in Amazon than SPY because I know it can perform better for the next 3-5-10 years. Not only Amazon, but you can also have similar comparisons with any of the blue chips, the results are quite similar. 

2. ETFs only battle ( Canadian best S&P 500 ETFs) – ZSP vs. VFV (BMO vs. Vanguard fund houses) – The returns for the past one year are around 18%, which is excellent, considering the pandemic. But again not as good as the US blue chips we have seen already. 

3. ZSP price for the past 1 year

4. Battle of the blue chips: NVIDIA vs. AMD: Again, look at the market returns for both these blue chip stocks, that’s more than 150% for the past one year alone. 

6. Amazon vs. Coca Cola – There’s no real competition, here again, numbers speak. 

7. NVIDIA vs. VFV – Should we even talk? 

From the above case studies and graphs we can conclude a few things:

  1. Investing in Coca Cola just because Warren Buffet said, doesn’t really make sense, even though over the long term the returns can be good and rewarding, I don’t think it can match the monopoly of stocks like Apple, FB, Microsoft or Tesla. Let’s leave this aside. 

  2. Investing even a single $ should be a thoughtful process and not because some financial advisor asked you to do so. You need to sit, research and understand the company before you do so. Every company has an Investor Relations page with the most recent quarterly results and the webinar call with analysts. Also, take help from YouTube, it has everything to get you started and to research good blue-chip stocks in the sectors you like and prefer. 

  3. Good companies never fail, stock prices might be high, but it’s always worth it because it will only get higher over time. So don’t wait or park your money in some non-performing assets. Act smart and in a timely manner. 

  4. If you can save $100 or $200 a month, invest it in growth stocks, the money will accumulate compounded over time. Don’t get into FOMO and sell. Patience always pays. 

  5. The US has better blue-chip growth companies than Canada, and always chase growth stocks over ETFs. It really pays. 

stocks vs etfs

Conclusion 

In this article, I did not want to cater to every investor mindset but rather take the approach I have learnt hard – Investing in blue-chip growth stocks and waiting for 3-5 years at least for it to grow. I’ll only consider increasing the portfolio only when required. 

Whether you like Apple, Microsoft, Google, Amazon or Tesla, it doesn’t really matter. Consistency and patience is always the key. 

If you cannot invest a lump sum today, you can still buy 1 stock of apple every month, that’s 12 stocks a year. By doing so, you’ll end up having a decent sized portfolio. 

Always prefer stocks over ETFs. Keep your portfolios simple and believe in the companies you invest in. 

Thanks for reading! Let me know your thoughts. 

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