Buy Individual Stocks, Funds, or ETFs - Which Is Better?

If you want to invest your money in securities, you may be facing a big decision right now: Should I buy individual stocks of my favorite companies or ETFs, so-called exchange-traded index funds? Or classic equity funds, where fund managers select and manage the individual positions? On this page you will find helpful information and tips about the differences, advantages and disadvantages of individual stocks, equity funds and ETFs.

 

Comparison of individual stocks, ETFs and equity funds

The following table shows a rough overview of the most important parameters of stocks, ETFs and funds.

	Individual Stocks	ETFs	Funds
Fees	low, only order fees on purchase & sale	moderate, management fee approximately 0.3 to 0.50% per year	high, management fee and manager remuneration approximately 1.0 to 2.5% per year
Return potential	correct stock selection is crucial, very high gains possible in a short time	Typically the ETF tracks the index of its underlying market and grows at the same rate as its index	depending on the fund manager, theoretically high returns are possible, but in the long run rarely better than ETFs
Risk	high risk with few stocks, total loss possible	relatively low risk due to high diversification	relatively low risk due to high diversification and the ability of fund managers to actively manage individual positions

 

Why you should buy individual stocks

Advantages of individual stocks

• Lowest fees: Costs are generally only incurred once at purchase and sale. No additional costs arise during the holding period.
• Great return potential: Dream returns and very high gains are possible.
• Maximum transparency: you know at all times which companies your money is invested in and in what proportions.

Disadvantages of individual stocks

• Also a higher risk of loss up to and including the bankruptcy of the company whose shares are held.
• To reduce the risk of loss, a higher investment amount is highly recommended, e.g. €10,000, €20,000 or more.
• The choice of stocks is crucial and has a significant influence on performance and returns. You should plan for more time for more intensive research and analysis of companies as well as evaluation of the current stock price.

 

Why you should prefer to invest in ETFs

Advantages of ETFs

• Comparatively moderate fees: More expensive than individual stocks, but significantly cheaper than equity funds. In addition to the order fees for buying and selling, there is a management fee, which is typically around 0.3 to 0.50% per year.
• Lower risk through broader diversification: great diversification, tracking many individual stocks is possible even with small investment capital. The MSCI World Index ETF covers significantly more than 1,000 stocks, for example.
• Minimal time investment when selecting investments, as no analysis of individual stocks is required.
• Good transparency: Since an index is tracked, you can look up at any time which stocks are represented in what proportions.
• Also many "special" ETFs available, so you can easily implement unusual strategies, e.g. investing in dividend aristocrats, sustainable companies, etc.

Disadvantages of ETFs

• Higher fees than when buying individual stocks. The annual management fee is typically around 0.3 to 0.50% per year.
  
• Return performance typically mirrors the underlying index and will not beat the market.

 

Why you should invest your money in active equity funds

Advantages of actively managed funds

• Lower risk through broader diversification: great diversification, tracking many individual stocks is possible even with small investment capital.
• Theoretically higher return potential than with a fixed market tracking in both upswing and downturn phases: Active management permanently monitors and analyzes all market developments and changes, allowing specialists to adjust and optimize the positions accordingly.
• Minimal time investment when selecting investments, as no analysis of individual stocks is required.
• More security in times of crisis through professional management: Particularly in times of crisis, it becomes apparent that managed funds achieve lower losses in a crash through active response and repositioning of stocks compared to simple index funds like ETFs (see e.g. Source #2).

 

Disadvantages of actively managed funds

• High fees: Management fee and manager remuneration amounts to approximately 1.0 to 2.5% per year.
• In the long term, the returns achieved are only rarely better than those of the cheaper ETFs. The additional gains achieved through active management are often "eaten up" by the fees (see e.g. Source #3).
• Less transparency: Due to active management, it is not always immediately clear which stocks are currently held in the fund and in what proportions.

 

 

Sources and interesting links:

1. mamakanngeld.com - Buy individual stocks or ETFs?
2. biallo.de - ETFs versus active funds: Who performs better?
3. boerse-online.de - Funds vs. ETFs: Who wins the return duel?

 

Which investments have you decided on? Do you prefer ETFs or individual stocks? What are your experiences on the stock market? We look forward to your feedback.

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