ETF vs Stocks: Pros and Cons of Each

Stash allows people to invest in almost anything—from renewable energy to the legal marijuana industry—with more than 90 exchange traded funds (ETFs) and hundreds of stocks to choose from. And with Stash, you don’t need the $3,000+ it takes to buy a single share of Amazon stock; you can buy only what you can afford with fractional shares—and can start investing with as little as $5.

Beyond how much, you might also be wondering where you should start: ETFs vs. stocks? Read on to learn the differences between the two, the pros and cons of each, and how both can fit into a diversified investing strategy.

ETFs vs stocks: different, with a lot in common

Stocks and funds have a lot of similarities—and some important differences. Let’s start with some definitions:

• A stock represents ownership in a particular company. You can own a share, or a fractional share, of a company’s stock.
• A fund, on the other hand, is a collection of securities. It’s like a basket of multiple stocks and sometimes other securities, like bonds, too. Funds might contain shares of hundreds or even thousands of different companies.

An ETF is one type of fund. (There are other kinds of funds too, like mutual funds.) ETF managers choose which securities to invest in based on an index or some other set of pre-defined guidelines. So an ETF investment represents an ownership stake in many companies—and potentially other securities like bonds, commodities, or real estate—rather than a piece of ownership in a single company.

For all the distinctions between ETFs vs. stocks, they also have a lot in common. Both trade on an exchange such as the New York Stock Exchange or Nasdaq, and both are investment vehicles that give investors an ownership stake in a company or companies. And the pros and cons of ETFs have some overlap with the pros and cons of stocks too.

The pros and cons of ETFs vs stocks

No matter what kind of securities you invest in, creating a diversified portfolio is important to mitigate risk. There are many ways to diversify, and both ETFs and individual stocks can play a role in your portfolio. There are upsides and downsides to both.

Pros and cons of ETFs:

• Pro: An ETF is a collection of securities, so it automatically gives you a degree of diversification. In fact, some ETFs specifically aim to give your portfolio broad exposure. For example, some have holdings in a diverse range of stocks, which may be less risky than investing in an individual company.
• Con: All investments involve some degree of risk, and some ETFs tend to be riskier than others. Just like any other security you’re considering, researching a particular ETF for pros and cons of that specific fund helps you understand how much risk you might incur. 

Pros and cons of stocks:

• Pro: Investing in a single stock can be riskier than going with an ETF—but that’s not always the case. For investors that can handle the ups and downs of the market, single stocks can be attractive.  But more conservative investors may find the risk too high. 
• Con: By their nature, individual stocks lack the broad exposure of a fund. A sequence of events that hurts a specific company or industry can have an outsized effect on the value of a particular stock. The same circumstances might have less of an impact on an ETF that contains multiple stocks.

Knowing your own personal risk profile can help you decide if ETFs vs stocks—or a mix of both—feels right to you. And as your portfolio takes shape and becomes increasingly diversified, you may decide to invest in different ETFs, single stocks, and more. Ultimately, the pros and cons of ETFs—just like the pros and cons of stocks or any other investment—are somewhat personal. What seems like a plus to one investor may be a downside for another, depending on whether your investing approach is more aggressive, conservative, or somewhere in between. 

Ready to build your portfolio?

The choice isn’t necessarily ETFs vs. stocks—your ideal portfolio may contain both, as well as other securities. As you weigh your options, you might want to take a deeper dive into ETFs and learn more detail on the difference between stocks and funds.

Your investment strategy may evolve as your financial landscape and risk tolerance shift over time. Whether you go with ETFs, stocks, or other investments, Stash gives you options. Both ETF and stock investments are available on Stash. Thanks to fractional shares, just $5 can get you started.