One common feature of an exchange-traded fund (ETF) and an individual stock is that investors can trade both freely through an exchange. While both investment vehicles share this similarity, they also have their differences.
Both have their place in an investor’s portfolio, but below are five reasons to pick an ETF over a stock.
1. Diversification Benefits
Like stocks are shares or fractional ownership of a company, the ETF owns underlying assets and divides ownership of those assets into shares. As such, these shares can be bought and sold on a major exchange.
Furthermore, as opposed to ownership of a company, ETFs own the actual stocks themselves. As such, ownership of an ETF offers diversification advantages compared to single stocks.
Stocks are exposed to all of the risk associated with ownership of that particular company. Conversely, an ETF that purchases a mix of stocks or other assets will have less risk exposure.
As stated, because of this flexibility, they can be traded intraday. This allows investors to trade them through online or traditional brokers just like stocks.
An ETF shareholder is also entitled to income earned through dividends. In the event the fund is liquidated, ETF shareholders may also receive a portion of its residual value, which is the value determined at the end of an asset’s useful life.
2. Sector Exposure
Investors who want to obtain a concentration in a certain sector would have to buy individual stocks that comprise that sector. However, with a single ETF, an investor can gain sector exposure since the fund contains a basket of shares containing various stocks as opposed to a single stock.
For example, an investor who wants to gain exposure to semiconductors in general would need to build a portfolio that may contain the leaders in that particular industry. Furthermore, an investor may just want exposure to medium-sized and foreign semiconductor companies.