Here Is Why It’s Usually Better To Buy Individual Stocks Than Exchange Traded Funds – Mike Swanson

I have a lot to say about exchange-traded funds, but before I do you need to know that I own exchange-traded funds (ETF). I own them in my IRA and often use them in other accounts I have too. So I’m not here to tell you that they are all bad, but I am going to tel you that there are hidden costs to them that most people don’t think about it.

An ETF simply holds a basket of stocks or securities that make up an index or a sector. So the DIA ETF holds the DOW 30-day stocks while XLF holds a basket of about 30 bank stocks and the GDX ETF holds about 30 gold mining stocks.

People often think that these ETF’s are well diversified when often they are not. Almost 50% of the XLF ETF is made up of six stocks and the same goes for GDX. So these ETF’s aren’t as “safe” as people think even if they are so easy to buy and sell.

The more important thing though is that these ETF’s all charge fees and pay very little interest in comparison to the stocks that make up the ETF. The GDX gold stock ETF for instance charges a 0.53% management fee and is paying a dividend yield of 0.47%.

Think about that management fee for a second. If you were going to invest $100,000 into the gold mining sector with that ETF that means you would pay $530 a year to do so.

If you bought say ten of the top stocks in the ETF that make up over 50% of it anyway and paid $10 in commission it would cost you $100.00 – AND you would get dividend of around a 1% yield through the course of the year.

That’s a difference of around $1,400. In other words if you put $100,000 into the ten top stocks that make up GDX instead of buying GDX you’d make an extra $1,400 over the course of the year.

Now if you were putting less money into the ETF like from a few hundred dollars to say $20,000 it would probably make more sense to buy the ETF than buy the stocks due to the commission costs – especially if you anticipate doing trades in and out of it.

The key take away for you here though is that if the commissions per trade are $10 and you are buying stocks the point at which the commissions on ten trades match a .54% ETF fee is at around the $20,000 mark.

ETF’s are easy to buy and sell. But if you are putting a lot of money into a sector or the market you might be better off simply buying ten or more of the stocks inside the ETF than buying the ETF in the long-run.

I believe so and that is why I use ETF’s more for smaller accounts than I do for my main big account where I to focus on individual stocks.

ETF’s seem so easy to trade and buy – but the fees are a real cost and will add up over the course of an investment lifetime.

Now there are 2X and 3X ETF’s out there too. The problem with these type of ETF’s is that they erode over time as they use derivatives. The gold stock ETF’s JNUG and NUGT are awful as they are triple ETF’s that just erode over time.

I talked about this topic in a video I did back in 2017:

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