ETFs vs. Stocks: A Guide to Similarities and Differences (2024)

What Is an ETF?

An exchange traded fund (ETF) is a basket of individual securities that can be bought and sold in a single trade on a stock exchange. The individual securities within an ETF can be stocks, bonds, currencies, commodities, or other investments.

When you buy shares of an ETF, you own a fraction of the underlying pool of investments, much like you do when buying shares of a mutual fund. The net asset value (NAV) of an ETF represents the per-share value of the fund’s assets less any liabilities.

ETFs have grown exponentially since 1993 when State Street Global Advisors launched the first US-listed ETF. Today, investors can choose from thousands of ETFs to meet their individual portfolio needs, from gaining broad market exposure and generating income to accessing difficult-to-reach markets.

What Is a Stock?

A stock is a security that represents fractional ownership of the specific issuing company. Publicly traded stocks trade on stock market exchanges, like the New York Stock Exchange or Nasdaq.

ETF vs. Stocks: Similarities

Transparency

The holdings of most ETFs are fully transparent and available daily. This means investors know what they own at any moment, allowing them to make more informed investment decisions with greater accuracy. Similarly, when investors hold individual stocks, they know what they own.

Broad Range of Investment Options

Both ETFs and stocks can be used to gain exposure to a variety of market segments, covering different geographic locations, market capitalizations, styles, sectors, and industries.

Transaction Fee or Commission

Because ETFs and individual stocks are bought and sold on an exchange, they are both generally subject to a transaction fee or commission. Note that some online brokers offer commission-free trading of stocks and ETFs.

Pricing and Trading

Investors can buy and sell ETF shares and individual stocks on an exchange continuously throughout the trading day. Because stocks and ETFs trade throughout the day on an exchange, they offer favorable liquidity and allow investors to make timely investment decisions and quickly execute based on shifting market conditions.

Exchange trading also means the trading prices of both ETFs and stocks represent the current market price. With an ETF, the share price may be slightly more or less than the net asset value (NAV).

Exchange trading also means investors can employ a wide range of trading techniques — from buying on margin to placing limit orders.

Dividends

Many companies periodically pay out a portion of their profits to shareholders in the form of dividends. Similarly, ETFs may receive dividends from stocks they hold, which are in turn paid to investors who own shares of the ETF.

ETFs vs. Stocks: Differences

Diversification

Passive, or index, ETFs generally track and aim to outperform a benchmark index. They provide access to many companies or investments in one trade, whereas individual stocks provide exposure to a single firm. As such, ETFs remove single-stock risk, or the risk inherent in being exposed to just one company.

The diversification of index funds across many securities can dilute the potential negative impact of poor performance of any one security.

Research and Management

ETFs are professionally managed funds backed by a team of experts working to meet the goals outlined in the fund’s prospectus. Fund managers are tasked with researching, buying, and selling individual holdings in return for a fee.

Expense Ratio

ETFs have an expense ratio, which includes management fees and the fund’s total annual operating expenses.

Capital Gains Distributions

Turnover in an ETF’s holdings — due, for example, to changes in an ETF’s underlying index — could trigger the sale of securities. This may trigger transaction costs and capital gains distributions. In this scenario, any realized gains or losses are passed on to ETF shareholders. To ensure tax efficiency, ETF managers attempt to limit these types of transactions as much as possible. ETFs’ tax-efficient in-kind redemption process used to meet shareholder redemptions limits capital gains distributions.

Are ETFs or Stocks Right for You?

When choosing whether to add individual stocks or ETFs to a portfolio, it’s important to consider your risk tolerance and overall investment objectives. In many instances, ETFs provide a solid foundation for a diversified investing strategy, offering an easy way to gain exposure to a breadth of asset classes, sectors, and regions.

For their part, individual stocks allow investors to express specific bets on companies, but their lack of diversification may increase overall portfolio risk. Ultimately, the optimal portfolio may contain a blend of stocks, ETFs, and other investment products.

Looking to Expand Your Knowledge of ETF Investing?

Explore our ETF Education Hub.

ETFs vs. Stocks: A Guide to Similarities and Differences (2024)

FAQs

ETFs vs. Stocks: A Guide to Similarities and Differences? ›

Broad Range of Investment Options

Both ETFs and stocks can be used to gain exposure to a variety of market segments, covering different geographic locations, market capitalizations, styles, sectors, and industries.

How are stocks and ETFs similar? ›

Broad Range of Investment Options

Both ETFs and stocks can be used to gain exposure to a variety of market segments, covering different geographic locations, market capitalizations, styles, sectors, and industries.

Do ETFs outperform individual stocks? ›

ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.

Are ETFs riskier than stocks? ›

ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.

What are the disadvantages of ETFs? ›

Disadvantages of ETFs. Although ETFs are generally cheaper than other lower-risk investment options (such as mutual funds) they are not free. ETFs are traded on the stock exchange like an individual stock, which means that investors may have to pay a real or virtual broker in order to facilitate the trade.

Why buy ETFs instead of stocks? ›

Advantages of investing in ETFs

ETFs tend to be less volatile than individual stocks, meaning your investment won't swing in value as much. The best ETFs have low expense ratios, the fund's cost as a percentage of your investment. The best may charge only a few dollars annually for every $10,000 invested.

Why is ETF not a good investment? ›

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

Is it smart to only invest in ETFs? ›

ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

What is the biggest advantage to owning an ETF rather than an individual company stock? ›

ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts. For nearly a century, traditional mutual funds have offered many advantages over building a portfolio one security at a time.

Is it better to buy stocks or ETF? ›

Investing in ETFs is the better choice if you want to diversify your holdings to reduce risk. Perhaps you're not interested in poring through company quarterly reports and investing newsletters and would rather have someone else pick and manage your holdings.

What happens if an ETF goes bust? ›

Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.

What is the single biggest ETF risk? ›

The single biggest risk in ETFs is market risk.

Do ETFs ever go to zero? ›

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

What are the five most actively traded ETFs? ›

U.S. ETF Movers
ETFPriceAverage Volume
SPY SPDR S&P 500 ETF Trust$500.9772.74M
QQQ Invesco QQQ Trust$422.8046.09M
IWM iShares Russell 2000 ETF$195.4236.91M
IVV iShares Core S&P 500 ETF$503.245.75M
46 more rows

Are Fidelity ETFs worth it? ›

Bottom line. These Fidelity ETFs all have attractive long-term returns and charge low expense ratios, making them a good fit for many investors. But you'll want to research them further and compare them with other funds – such as the best small-cap ETFs – to see if they work best for your needs.

How long do you hold ETFs? ›

Holding period:

If you hold ETF shares for one year or less, then gain is short-term capital gain. If you hold ETF shares for more than one year, then gain is long-term capital gain.

What is similar to ETFs? ›

Exchange-traded notes (ETNs) are unsecured debt securities that track an underlying index of securities. ETNs are different from exchange-traded funds, which also track an underlying index of securities, but trade like a stock. ETNs bring some credit risk that ETFs don't have, while ETFs bring tracking risk.

What is the comparison between ETF and mutual funds? ›

ETFs have lower expense ratios. Mutual funds have higher management fees. ETFs are passively managed, mirroring a particular index, making them less risky and transparent. Mutual funds are actively managed, with fund managers investing based on analysis and market outlook.

Is an ETF a common stock? ›

ETFs are bought and sold like a common stock on a stock exchange.

Are ETFs and index funds similar? ›

The differences between the two tend to be small; in fact, index funds and ETFs are often (but not always) the same thing. Thus, which one you choose is less important than the choice to start investing. In doing so, you take advantage of low fees and diversification, and an investment that will grow over time.

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