Every single day, investors the world over look inside and ask themselves, “What should I buy?” Although there are numerous advantages to purchasing exchange traded funds (ETFs), there are certain investors who might be happier owning a single stock instead.
If you are seeking sector exposure, an ETF is one of the best ways to offset the risk of a single stock or company. You might believe that in purchasing an ETF, you will get the average return of a sector, that isn’t necessarily the case across the board, says Hans Wagner for Investopedia. [A Brief History of ETFs.]
If you’re thinking about mitigating risk and volatility, an ETF might be your best choice. They offer a high level of diversification that would otherwise be costly to get through single-stock picking. [10 Reasons to Love ETFs.]
Depending on what you’re looking for, sometimes a single stock may be a better option for you than an ETF. It’s key to understand the vagaries of certain sectors:
- Sectors that do have a narrow dispersion of returns from the mean do not offer stock pickers an advantage when trying to generate market-beating returns. Utilities and consumer staples are an example.
- Often, the stocks in a particular sector are subject to disperse returns, yet investors are unable to select those securities which are likely to continue over-performing. Biotechnology and semiconductors are good examples; there are so many upstarts that never quite get going. All it takes is one big hit, but who will have the big hit is another question entirely.
- Stock-picking offers an advantage over ETFs, when there is a wide dispersion of returns from the mean, then you can gain an advantage using your knowledge of the industry or the stock.
For more stories about ETFs, visit our ETF 101 category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.