ETFs vs. Stocks: A Guide to Similarities and Differences
While exchange traded funds (ETFs) and individual stocks have plenty of common characteristics, there are important differences between the two investment vehicles. Learn more about how ETFs and stocks compare so you can tailor your portfolio to your investment goals.
What Is an ETF?
An exchange traded fund (ETF) is a basket of individual securities an investor can buy and sell in a single trade on a stock exchange. The individual securities within an ETF can be stocks, bonds, currencies, commodities, or other investments.
When you buy shares of an ETF, you own a fraction of the underlying pool of investments, similar to buying shares of a mutual fund. The net asset value (NAV) of an ETF represents the per-share value of the fund’s assets less any liabilities.
ETFs have grown exponentially since 1993 when State Street Global Advisors launched the first US-listed ETF. Today, investors can choose from thousands of ETFs to meet their individual portfolio needs. These needs include gaining broad market exposure, generating income, and accessing difficult-to-reach markets.
What Is a Stock?
A stock is a security that represents fractional ownership of the specific issuing company. Publicly traded stocks trade on stock market exchanges, like the New York Stock Exchange or Nasdaq.
ETF vs. Individual Stocks: Similarities
Transparency
The holdings of most ETFs are fully transparent and available daily. This means investors know what they own at any moment, enabling them to make more informed investment decisions with greater accuracy. Similarly, when investors hold individual stocks, they know what they own.
Broad Range of Investment Options
Investors can use both ETFs and stocks to gain exposure to a variety of market segments, covering different geographic locations, market capitalizations, styles, sectors, and industries.
Transaction Fee or Commission
Because ETFs and individual stocks are bought and sold on an exchange, they are both generally subject to a transaction fee or commission. Note that some online brokers offer commission-free trading of stocks and ETFs.
Pricing and Trading
Investors can buy and sell ETF shares and individual stocks on an exchange continuously throughout the trading day. Because stocks and ETFs trade throughout the day on an exchange, many offer favorable liquidity and enable investors to make timely investment decisions and quickly execute based on shifting market conditions.
Exchange trading also means the trading prices of both ETFs and stocks represent the current market price. With an ETF, the share price may be slightly more or less than the net asset value (NAV).
Exchange trading also means investors can employ a wide range of trading techniques — from buying on margin to placing limit orders.
Dividends
Many companies periodically pay out a portion of their profits to shareholders in the form of dividends. Similarly, ETFs may receive dividends from stocks they hold, which are in turn paid to investors who own shares of the ETF.
ETFs vs. Individual Stocks: Differences
Diversification
Passive, or index, ETFs generally track or aim to outperform a benchmark index. They provide access to many companies or investments in one trade, whereas individual stocks provide exposure to a single firm. As such, ETFs remove single-stock risk, or the risk inherent in being exposed to just one company.
The diversification of index funds across many securities can dilute the potential negative impact of poor performance of any one security.
Research and Management
ETFs are professionally managed funds backed by a team of experts working to meet the goals outlined in the fund’s prospectus. Fund managers are tasked with researching, buying, and selling individual holdings in return for a fee.
Expense Ratio
ETFs have an expense ratio, which includes management fees and the fund’s total annual operating expenses.
Capital Gains Distributions
Turnover in an ETF’s holdings — due, for example, to changes in an ETF’s underlying index — could trigger the sale of securities. This may trigger transaction costs and capital gains distributions. In this scenario, any realized gains or losses are passed on to ETF shareholders. To ensure tax efficiency, ETF managers attempt to limit these types of transactions as much as possible. ETFs use the tax-efficient in-kind redemption process to meet shareholder redemptions and help limit capital gains distributions.
Stocks vs. ETFs: Similarities and Differences
| ETFs | Individual Stocks | |
| Transparency | Fund holdings generally made available each day | Investors know what they own |
| Range of Asset Classes | Offer exposure to a variety of market segments | Offer exposure to a variety of market segments |
| Transaction Fee or Commission | Generally subject to a transaction fee | Generally subject to a transaction fee |
| Pricing and Trading | Exchange traded; investors can buy and sell shares continuously throughout the trading day at market prices | Exchange traded; investors can buy and sell shares continuously throughout the trading day at market prices |
| Dividends | Yes, where applicable | Yes, where applicable |
| Diversification | High; provide access to many companies or investments in one single trade | Low; provide exposure to a single firm |
| Research and Management | Professionally managed | Investors handle research and trading on their own |
| Expense Ratio | Yes | No |
ETFs vs. Stocks: What's Right for You?
When choosing whether to add individual stocks versus ETFs to a portfolio, it’s important to consider your risk tolerance and overall investment objectives. In many instances, ETFs provide a solid foundation for a diversified investing strategy, offering an easy way to gain exposure to a breadth of asset classes, sectors, and regions.
For their part, individual stocks enable investors to express specific bets on companies, but their lack of diversification may increase overall portfolio risk. Ultimately, the optimal portfolio may contain a blend of stocks, ETFs, and other investment products.
Invest in Your ETF Education
Whether you’re new to investing or a seasoned investor, our ETF Education Hub can help you discover how to evaluate ETFs, use them in a portfolio, and more.
Frequently Asked Questions
What’s the difference between an ETF and a mutual fund?
To learn more about the differences between ETFs and mutual funds, click here.
Do ETFs pay dividends?
Many ETFs pay dividends, but some do not. When the stocks or securities within an ETF pay dividends, the ETF will usually pass these dividends onto shareholders of the ETF. Dividends are typically paid out on a monthly or quarterly basis. Learn more about dividend investing and the role dividends can play in an investment strategy.
What is riskier — stocks or ETFs?
ETFs are usually less risky than individual stocks because they are typically more diversified, depending on the ETF’s structure and holdings. Individual stocks tend to be riskier, but can also provide greater returns than ETFs. Learn more about the benefits of ETFs.
How long do you hold an ETF vs. a stock?
An investor can hold an ETF or individual stock for as long or little of time as they wish. It is important for investors to carefully consider their investment objectives and risk tolerance before investing in any investment vehicle. Use this analysis to determine your desired holding period, risk tolerance, investment strategy, and financial goals.
When was the first US ETF launched?
In 1993, State Street Global Advisors launched the first US-listed ETF. To learn more about the history of ETFs, the reasons the ETF industry is booming, and more, download our Investor’s Guide to ETFs.