ETF vs. Stock: What's The Difference?

ETFs are taking flight on the market. Their popularity continues to increase amongst investors. As of 2020, there were 7,602 ETFs available worldwide on the financial markets.
Since there is quite a selection of ETFs, it’s hard enough to choose between them. Plus, you may find yourself debating between stocks too.
To help you make an educated decision, let’s unravel the differences between ETFs and stocks.

Sectors of the Stock Market

The stock market consists of 11 major sectors, based on the Global Industry Classification Standard (GICS):

1. Technology
2. Health Care
3. Financial
4. Real Estate
5. Energy
6. Materials
7. Consumer Discretionary
8. Industrials
9. Utilities
10. Consumer Staples
11. Telecommunications

Each sector contains publicly traded companies that offer stocks, options and ETFs. It’s important to familiarize yourself with each sector to expose your portfolio to different areas.

What Are Alpha and Beta?

In the stock market, alpha is a measurement of the performance of an investment.
The focus of alpha how an investment outperforms the overall market and whether that investment will perform stronger than it has historically. It is often used with mutual funds and ETFs.
Alpha has a complimentary indicator, known as beta. Beta measures volatility and is represented as 1. A fund, stock or ETF rated above one indicates that the price is subject to volatility generally higher than the market. Below one indicates volatility at a lesser rate.

What Is an ETF?

The acronym ETF stands for Exchange-Traded Fund. Under the 1940 Act, an ETF must be registered with the Securities Exchange Commission (SEC) as either a(n):

• Unit of investment or,
• An open-end investment company, otherwise known as a “fund”

An ETF resembles that of a mutual fund and a stock. It pools together diversified investments carefully selected and managed by the account organizer. And, it is traded on the market with its own unique ticker.
Investors who want to minimize risk and are looking for slow growth are well-suited for ETFs.

Types of ETFs

When we look at how ETFs are managed, there are two types:

1. Index-based - tracking an index, such as the S&P 500. These are passively managed funds.
2. Actively managed - not as common and do not follow the performance of an index.

There are also many types of ETFs to invest in. This includes:

• Equity ETFs - stocks and other securities
• Commodity ETFs - precious metals, oils, and more
• Bond or Fixed Income ETFs (Non-equity) - investment in debt
• International ETFs - foreign securities that may or may not be trackable due to foreign reporting requirements.
• Sector ETFs – those that may track one or more of the sectors mentioned earlier
• Dividend ETFs – focused on income producing stocks paying dividends

Benefits of ETFs

Why are ETFs attractive to investors? They offer many benefits, including:

• Diversity - your portfolio is exposed to many securities, not just one.
• Transparency - Net Asset Value (NAV) of ETFs are disclosed daily, guiding investors on buy/sell decisions.
• Tax Efficiencies - Buying and selling are quiet for ETFs tracking indexes. That means fewer capital gains or losses to be concerned about.
• Specialization - ETFs open the door to niche markets that are not easily accessible on their own
• Cost - Because the accounts are passively managed (in the case of index ETFs), the fees are relatively low.  
• Market Orders - Like stocks, ETFs can use automation, placing stop-loss orders and order limits to help limit price slippage from poor order execution.

What Is Stock?

When you purchase stock, you f you’re buying equity ownership in a company. Generally speaking, when that company does better and makes a profit, you as a shareholder also do better, and the price of your stock go up. There’s not always a direct relationship and there are many factors that can cause the stock’s value to fluctuate.  You want to aim for buying low so that you can sell it for gains when it hits a peak. That’s what makes it exciting.

Types of Stock

Stock comes in two types:

1. Common Stock
2. Preferred Stock

Both are eligible to pay out dividends.
Investors frequently purchase common stock over preferred. There is more of it available on the market. Common stock provides investors:

• The right to vote on the company’s Board of Directors
• Approval or denial of crucial corporate decisions
• The last seat on the bus if the company folds

With preferred stock, investors are sent to the front of the line; however, they lose their right to vote.
They are paid dividends before a common stockholder, for example. If the company pays a dividend, preferred shares also have a greater dividend yield than common shares.
Let’s look at some of the categories of common and preferred stock.
Growth Stocks
Start-up companies in the technology field, for example, may wind up as growth stocks. This occurs when company earnings are multiplying faster than the market average, or if the company has no earnings but there are high expectations of future profits.
Income Stocks
Income stocks are sought after due to the revenue generated. Most payout dividends, too.
Value Stocks
Value stocks generally have what seasoned investors would call ‘cheap’ price-to-earnings (P/E) ratios. These may have been previously labeled as growth or income stocks; however, the demand slowed down along with their growth.
Investors choose value stocks hoping that these companies were overlooked and the demand will surge once more.
Blue-chip Stocks
Think large, well-known companies with a history of growth. Blue-chip stocks are likely to pay dividends too.

Tips When Investing In Stock

Here are some tips to help your stock investment:

• Remove emotions from the equation. Face the reality of day trading as prices are prone to fluctuate.
• Keep a diversified portfolio. Don’t keep all of your stocks in one basket. Spread your investment capital across sectors for balance.
• Buy because of the company, not the price.
• Take your time and use buying strategies such as dollar-cost average, buy-in thirds, and buy “the basket.”

Which Stocks Do You Choose?

Want to give your hand a try in stock picking? Either the investor or a financial advisor has the ability, and it goes beyond picking at random.
Let’s break down the steps involved:

1. Define your investment goals. Are you looking for a short-term investment or long-term? Are you building a first-time portfolio or trying to preserve a current one? These are a couple of examples of what to identify in this step.
2. Understand the company you want to own shares in. Who do they compete with? What sets them apart? Grasp how they make money and how they operate.
3. Assess the competitive advantage. Does the company have the ability to provide a durable, high-demand product or service? Or are they able to sell them at an attractive cost?
4. Determine a fair price. When it’s time for analysis. Check out ratios such as the price-to-earnings, price-to-sales, dividend yield, and the discounted cash flow model. What do they tell you about the value of the company’s stock?
5. Hold a margin of safety. You have a fair price in mind; now search for stocks below it. Assess your margin often as you may need to increase or decrease it depending on the stability of a company.

Stocks are a great choice for investors who do not mind taking risks and prefer to outperform the market.

ETF vs. Stock - What is Different?

Although ETFs are traded on the stock exchanges, just like conventional stocks are, they are not the same. This is due to make-up.
How Many Shares?
When a company issues stock, the number of shares issued is capped. It can change, but it doesn’t occur frequently.
ETFs move through a process of creation and redemption to stay consistent with the average share price of the fund. Thus, if the price needs to be reduced, more shares are issued, whereas if it needs to be increased, they are redeemed.
Diversity and Return
ETFs bundle industries, sectors, commodities, and more, creating a diversified portfolio. Diversity minimizes the exposure of risk, increasing your opportunity for a gain or return.
Stocks, on the other hand, are sold separately. They are capable of higher returns than ETFs and other investments. Although, they are generally packaged with a greater risk.

ETF vs. Mutual Fund

The biggest difference between an ETF and a mutual fund is how the shares are redeemed and sold. An Authorized Participant (AP) is responsible for buying and selling shares; they are not purchased directly from retail investors.
ETFs appeal to investors for a bonus because of their lower fees. That’s because most ETFs are passively managed, whereas mutual funds are actively managed.

The Bottom Line

Review your financial goal before committing to any type of investment. Each behaves differently and needs to align and perform alongside your goal.
There is no guarantee of gain or loss when investing in ETFs or stocks, so it’s important to assess your risk tolerance before setting sail.
ETFs offer growth and make diversifying a portfolio easier. Whether they are built based on a particular sector, or for a specific task (such as a wedding, a vacation, or retirement), they can appeal to investors of all ages.
Visit LifeGoal Investments to learn more about ETFs and how you can simplify investing to meet your real-life needs.
 
 
Sources:
Exchange-Traded Funds (ETFs) | Investor.gov
Number of ETFs worldwide 2020 | Statista
Stocks | Investor.gov
Carefully consider the Fund’s investment objective, risks, charges and expenses before investing. This and other additional information may be found in the statutory and summary prospectus, which may be obtained by calling 1-888-920-7275, or by reading the prospectus. Read the prospectus carefully before investing.
Distributed by Foreside Fund Services, LLC. Member FINRA.
ETFs are only one option when seeking to achieve goals. Prior to investing in any of the LifeGoal ETFs you should consult with your financial advisor to determine whether the specific funds are appropriate for you and, if so, how your investment plan should be implemented. The LifeGoal ETFs are not intended to be short term savings vehicles for payment of monthly expenses.
IMPORTANT RISK INFORMATION:
Investing involves risk, including loss of principal, and there is no guarantee that that Fund will meet its investment objectives. The value of a fund’s shares, when redeemed, may be worth more or less than their original cost. The Fund bears all risks of investment strategies employed by the underlying funds, including the risk that the underlying funds will not meet their investment objectives. ETFs may trade in the secondary market at prices below the value of their underlying portfolios and may not be liquid. Fixed income investments are affected by a number of risks, including fluctuation in interest rates, credit risk, and prepayment risk. In general, as prevailing interest rates rise, fixed income prices will fall. Lower-quality bonds present greater risk, including an increased risk of default. An economic downtown or period of rising interest rates could adversely affect the market for these bonds and reduce the Fund’s ability to sell its bonds. The lack of a liquid market for these bonds could decrease the Fund’s share price. Investments in international markets present special risks including currency fluctuation, the potential for diplomatic and political instability, regulatory and liquidity risks, foreign taxation, and differences in auditing and other financial standards. Exposure to the commodities market may subject the Fund to greater volatility than investments in traditional securities. The Fund is a new ETF with a limited history of operations for investors to evaluate.
Investments made through an ETF and the results that those investments generate are not expected to be the same as those made through any other ETF from LifeGoal Investments, including one with a similar name. Additionally, a new or developing ETF’s performance may not be representative of how that ETF will perform in the future. Newer ETFs that are still developing may not yet have the assets to reach efficient investing and trading status. Furthermore, certain factors may affect the performance of a smaller or developing ETF in its early stages. An ETF may need to sell portions of its portfolio at certain points due to unpredictable purchasing patterns. However, the changes in an ETF’s overall value as the result of an unexpected portfolio change are not expected to be representative of the ETF’s long-term performance.