To The Moon

🌟🌟🌟In 2008, Warren Buffett placed a million dollar bet that an S&P500 Index Fund would beat the funds that hedge fund managers would select over a 10 year period.  Tom Seides of Protege Partners accepted the challenge.  Guess who won the bet?  Warren Buffett.

In the 9 years from 2008 through 2017, Warren Buffett's chosen investment the Vanguard 500 ETF $Vanguard S&P 500 ETF(VOO)$  delivered an annual return of 7.1%.  In contrast the hedge fund portfolio selected by Protege Partners managed only a 2.2% average return.

The lesson to be learnt from this bet is that simplicity often wins over complexity in investing.  It also highlights the fact that beating the market consistently is really difficult even for highly skilled traders with vast resources and sophisticated trading strategies.

Nonetheless let's compare the similarities and differences between ETFs and stocks to decide which is better class of investments.

What are Stocks?

Stocks, also known as Equities, are investment securities which represent ownership in a  company.  So when an investor buys shares of a stock, he is buying fractional ownership of a company, which will in turn use the investor's money as capital.   As a stock owner, an investor can then share in any profits of the company.

Even though investors can buy shares of privately held companies, stocks are most commonly purchased as shares of companies that are publicly listed and traded on exchanges such as the New York Stock Exchange ( NYSE) or Nasdaq.  In order to gain access to stocks, investors need an investment account for trading such as a brokerage account like Tiger Brokers.

What are ETFs?

An ETF or Exchange Traded Fund is a pooled investment security that trades intraday on an exchange.  An ETF can invest in hundreds of individual investment assets, such as stocks or bonds in one packaged security.

The Pros and Cons of ETFs versus Stocks

Diversification: Rather than investing in just one stock, an ETF can provide exposure to hundreds of stocks or other assets in one packaged security.

Less Volatility : An ETF that tracks the performance of an index of stocks will generally have less pronounced price movements up and down compared to an individual stock holding.  Thus an  ETF will generally provide more stable returns than a stock.

Simplicity: Investors require little expertise to invest in ETFs, whereas stock investing requires a greater degree of knowledge, research, analysis and monitoring to manage properly.

Long term performance : For periods of 10 years or longer, ETFs and Index funds that track the performance of a broad market index such as $SPDR S&P 500 ETF Trust(SPY)$  have outperformed most actively managed portfolios that invest similarly.

Cons of Investing in an ETF versus Stock

Lack of Control: Stock investors can choose the stocks to hold in a portfolio whereas ETF investors are not able to select the stocks held in an ETF.

Potential for underperformance : A single stock or a small portfolio of stocks can outperform  a broad market index such as $SPDR S&P 500 ETF Trust(SPY)$ . However an ETF that tracks the performance of an index will never outperform its benchmark.

Fees: Although ETFs have low fees, stocks do not have fees.

Bottom Line on ETFs versus Stocks 

While ETFs and stocks share some similarities, ETFs are diversified investment vehicles that hold a basket of assets while stocks represent ownership in a single company.  In conclusion, stocks provide direct exposure to a single company's performance and receive dividends but lack the diversification inherent in ETFs. 

Ultimately the decision in choosing between ETFs and stocks is a personal choice. 

I choose to invest more in ETFs as I believe that it is a lot easier and more cost effective than buying individual stocks.  I also like the wide diversification that ETFs provide at a fraction of the cost that I would have to pay if I was to invest in individual stocks.

Warren Buffett said that "The goal of the non professional should not be to pick winners, but should rather be to own a cross section of businesses that in aggregate are bound to do well.  A low cost S&P500 Index Fund like $SPDR S&P 500 ETF Trust(SPY)$ will achieve this goal."

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