ETFs vs. Stocks: Which is the Better Investment?

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Here are the main differences between ETFs and stocks:

Diversification: ETFs offer diversification; stocks do not.
Cost: ETFs have management fees; stocks do not.
Management: ETFs can be managed; stocks are not.
Risk: ETFs are generally lower risk; stocks are higher risk.
Income: ETFs may pay dividends; stocks may or may not.

When thinking about where to put their money, traders often compare Exchange-Traded Funds (ETFs) with individual stocks. Both have their pros and cons, making them fit different styles of investing. Knowing what sets them apart can help you make smarter choices. ETFs allow you to invest in a mix of assets, while stocks give you direct ownership in one company. Your decision should depend on how much risk you're willing to take, your long-term goals, and how hands-on you want to be with managing your investments.

In this article, we will explore the key differences in cost, diversification, liquidity, and ownership to help you choose the right option.

The features of ETFs vs. Stocks

ETFs and stocks vary significantly in terms of diversification, cost structure, liquidity, and control, each influencing their suitability for different types of traders.

Diversification

ETFs: ETFs offer natural diversification by holding different assets like stocks, bonds, or commodities. For example, an ETF that tracks the S&P 500 includes shares from 500 large U.S. companies, providing wide market exposure without needing to pick individual stocks. This makes ETFs attractive for those wanting a mix of investments in one place.
Stocks: In contrast, stocks represent a share in one company, meaning there’s more risk involved since your investment relies solely on that company’s performance. However, if the company does well, the returns can be substantial. Early investors in companies like Tesla or Amazon have seen their investments grow significantly.

Cost structure

ETFs: ETFs are generally more cost-effective than stocks, especially for those looking to build a diversified portfolio. ETFs typically have lower expense ratios, averaging around 0.03% to 0.10%, which is much lower than mutual funds, which typically have higher expense ratios, averaging around 0.50% to 1.00%, and ETFs do not charge management fees, making them a cost-efficient choice for long-term investments. The average expense ratio for ETFs has been decreasing, further enhancing their appeal to cost-conscious traders.
Stocks: Investing in individual stocks can be more expensive due to trading fees and the need to purchase multiple stocks to achieve diversification. For example, replicating the diversification of an ETF like the S&P 500 would require buying shares of 500 different companies, incurring significant transaction costs. However, for traders who prefer to manage their own portfolios, the absence of management fees is a notable advantage.

Liquidity and management

ETFs: As of 2025, ETFs continue to offer high liquidity, allowing traders to buy and sell shares throughout the trading day at market prices. The average daily trading volume (ADV) for US-listed ETFs has increased to $46.3 billion, reflecting their growing popularity among investors. This liquidity is further supported by the "creation and redemption" mechanisms inherent in ETFs, which help maintain their price close to the net asset value (NAV). The bid-ask spreads, a key indicator of liquidity, have also tightened, with US-listed ETFs averaging 22.3 basis points, indicating strong market quality. This level of liquidity makes ETFs a reliable option for investors seeking both flexibility and cost efficiency.
Stocks: Stocks also offer high liquidity, allowing traders to buy and sell shares during market hours. However, liquidity can vary depending on the company’s size and market presence, with large-cap stocks generally being more liquid than small-cap stocks. For example, stocks of major corporations like Microsoft or Coca-Cola tend to have higher liquidity than those of smaller companies .

Risks and control

ETFs: When investing in ETFs, traders own a share of the fund, not the underlying assets. This means there are no voting rights in the companies that the ETF invests in. ETFs are more suited to those who prefer a hands-off approach to investing. The growing popularity of passive management strategies has seen assets under management in passive ETFs surpass those in actively managed funds.
Stocks: Purchasing stocks gives traders direct ownership in the company, along with voting rights on key corporate decisions. This control is appealing to those who want a say in the management of the companies they invest in. Shareholder activism has been on the rise, with investors increasingly using their voting power to influence corporate governance.

Income

ETFs: Often pay dividends based on the underlying assets they hold, such as stocks or bonds. These dividends are distributed to investors and can provide a regular income stream. Some ETFs may also reinvest dividends, depending on their structure.
Stocks: Individual stocks may pay dividends, but it's not guaranteed. Dividend payments depend on the company's profitability and its decision to share profits with shareholders. Some companies may choose to reinvest profits back into the business instead of paying dividends.

Choosing the right broker for ETF and stock investments involves evaluating various aspects such as available assets, account requirements, and additional features like demo accounts and fractional shares. The following table compares the top brokers that offer stock trading, detailing key factors including account minimums, interest rates, access to penny stocks, and bonds.

Best brokers for ETF and stock investments
	Interest rate	Basic stock/ETF fee	Min. stock/ETF fee	Open an account
eOption		$3 per trade	$3 per trade	Open an account Via eOption's secure website.
Wealthsimple	1	Zero Fees	Zero Fees	Open an account Via Wealthsimple's secure website.
Ally Bank		Zero Fees	Zero Fees	Study review
Interactive Brokers	4,83	0-0,0035%	$1,00	Open an account Your capital is at risk.
SoFi Invest	0,01	Zero Fees	Zero Fees	Study review

Pros and cons of investing in ETFs

Diversification: ETFs offer broad market exposure, reducing the risk associated with investing in individual stocks. During market downturns, diversification in ETFs can help mitigate losses, as not all sectors or companies decline at the same rate.
Cost-efficiency: Lower expense ratios and no management fees make ETFs an affordable option for long-term traders. In 2023, the average expense ratio for ETFs was about 0.07%, compared to 1.00% for mutual funds.
Liquidity: ETFs can be bought and sold throughout the trading day, offering flexibility and quick access to funds, which is particularly beneficial during periods of market volatility.
Easy access to specific markets. ETFs can help you invest in areas like cybersecurity or clean energy without needing to choose individual companies. It’s a good way to tap into sectors that are likely to grow, giving you a broader reach in your investments while reducing your risks.
Less impact from taxes. One of the lesser-known perks of ETFs is how they manage taxes. Because of how they process redemptions, you often avoid paying capital gains taxes that would otherwise come with mutual funds. This can really boost your overall returns, especially if you're investing in a taxable account for the long term.

Limited control: Investors in ETFs do not own the underlying assets, meaning they have no voting rights or direct influence over the companies in the fund. This can be a drawback for those who want to engage in shareholder activism.
Tracking errors: Some ETFs may not perfectly track their underlying index, leading to slight discrepancies in performance.
Over-diversification: ETFs can sometimes be too diversified, diluting potential gains from high-performing assets. For example, an ETF tracking the entire market may include underperforming sectors, which can drag down overall returns.
Risk in leveraged ETFs. Leveraged ETFs can be attractive because they seem like a quick way to make more money. But they don’t always perform as you’d expect over time, and if you hold them too long, the returns can be much different than what you hoped for, leading to losses you didn’t plan for.

Pros and cons of investing in stocks

Higher potential returns: Stocks offer the possibility of significant gains if the company performs well, making them attractive to risk-tolerant traders. Companies like Tesla and NVIDIA have seen their stock prices soar, providing substantial returns to early investors.
Ownership and control: Stockholders have voting rights and can influence the direction of the companies they invest in, which is particularly appealing to those who want to play an active role in shaping corporate policies.
Dividend income: Many stocks pay dividends, providing traders with a steady income stream in addition to capital gains. Dividends can be particularly beneficial during market downturns, offering a source of income even when stock prices are volatile.

Higher risk: Investing in individual stocks carries a higher risk due to the lack of diversification. The performance of the investment is tied to the success or failure of a single company, making it susceptible to company-specific risks.
Cost: Building a diversified stock portfolio can be expensive due to trading fees and the need to purchase multiple stocks. Even with the advent of commission-free trading, the costs associated with buying a large number of stocks can add up.
Time-consuming: Managing a portfolio of individual stocks requires more time and effort, as traders need to stay informed about the companies they own and market trends.
Managing emotional volatility. Stock prices fluctuate frequently, which can trigger emotional reactions. The temptation to sell when prices drop, even when the company’s fundamentals remain strong, can lead to losses.

ETFs vs. Stocks: finding the right mix for investment goals

When choosing between ETFs and stocks, a key point to think about is how easy it is to buy or sell them when you need to. ETFs, especially the ones tied to big market indexes, are traded a lot, meaning you can usually sell them anytime during the day without much fuss. With individual stocks, especially from smaller companies, it’s a different story — if not many people are trading that stock, you might have trouble selling it when you want to, especially if the market’s in a rough patch. If you’re just starting out and prefer the idea of being able to get in or out quickly, ETFs make things easier.

Another thing to consider is how dividends are handled. While individual stocks pay you dividends directly, ETFs — especially those focused on dividends — often reinvest them automatically. This reinvestment can help your money grow over time without you needing to do anything. If you’re aiming for long-term growth and don’t want to deal with the work of reinvesting dividends yourself, dividend ETFs can help you keep things simple while still benefiting from both income and growth.

Summary

Choosing between ETFs and stocks depends on investment goals, risk tolerance, and the level of involvement desired in managing the portfolio. ETFs are an excellent choice for those seeking diversification and cost-efficiency with minimal effort, while stocks are better suited for those desiring higher potential returns, ownership, and control over their investments. A balanced approach that combines both ETFs and stocks may provide the best of both worlds, offering diversification, growth potential, and flexibility.

FAQs

Can both ETFs and stocks be included in a portfolio?

Yes, many traders include both ETFs and stocks in their portfolios to balance diversification from ETFs with the growth potential of individual stocks.

Are ETFs less risky than stocks?

ETFs are generally considered less risky than individual stocks due to their diversified nature, but they still carry market risk depending on the assets they track.

Do ETFs distribute dividends?

Some ETFs distribute dividends if the underlying assets in the fund do. These dividends are usually paid out quarterly, providing an additional income stream.

Which is more suitable for long-term investing: ETFs or stocks?

ETFs are often preferred for long-term investing due to their diversification and lower costs, while individual stocks may offer higher returns for those willing to accept more risk.

Team that worked on the article

Parshwa is a content expert and finance professional possessing deep knowledge of stock and options trading, technical and fundamental analysis, and equity research. As a Chartered Accountant Finalist, Parshwa also has expertise in Forex, crypto trading, and personal taxation. His experience is showcased by a prolific body of over 100 articles on Forex, crypto, equity, and personal finance, alongside personalized advisory roles in tax consultation.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

Volatility

Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.

Fundamental Analysis

Fundamental analysis is a method or tool that investors use that seeks to determine the intrinsic value of a security by examining economic and financial factors. It considers macroeconomic factors such as the state of the economy and industry conditions.

Leverage

Forex leverage is a tool enabling traders to control larger positions with a relatively small amount of capital, amplifying potential profits and losses based on the chosen leverage ratio.

Cryptocurrency

Cryptocurrency is a type of digital or virtual currency that relies on cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies operate on decentralized networks, typically based on blockchain technology.

Crypto trading

Crypto trading involves the buying and selling of cryptocurrencies, such as Bitcoin, Ethereum, or other digital assets, with the aim of making a profit from price fluctuations.