ETFs or Stocks: Which Investment Type Is Right for You?

When you start investing your money, you’re often faced with the decision: ETFs or stocks? Both investment types have their advantages but also come with different risks and characteristics. In this article, you’ll learn what distinguishes ETFs from stocks, who each investment type is suitable for, and how to find the right mix of both for your portfolio.

The Key Differences Between ETFs and Stocks

Before deciding between ETFs and individual stocks, it’s important to understand the fundamental differences between these two investment types. Both ETFs and stocks offer opportunities and risks, but their structure and management are significantly different.

Individual Stocks vs. Diversified ETFs: What’s Right for You?

Individual stocks represent ownership in a single company. When you buy a stock, you become a co-owner of that company and benefit from its stock price gains and dividends—provided the company is successful. However, you’re also highly dependent on the company’s fate: if the company struggles, the value of your stocks will suffer, potentially leading to a total loss if the company goes bankrupt.

ETFs (Exchange Traded Funds), on the other hand, are funds that track an entire stock index, like the S&P 500 or the MSCI World. An ETF typically includes a broad range of different stocks, providing automatic diversification. Instead of investing in a single company, you’re investing in a basket of companies, which significantly reduces risk.

For investors who don’t want or aren’t able to spend time researching individual companies, ETFs are often the better choice, offering an easy way to invest broadly and diversified in the market.

Comparing the Risk Between Stocks and ETFs

Risk is a central factor when deciding between stocks and ETFs. Investing in individual stocks is generally riskier because their performance is closely tied to a single company. If you invest in a struggling company, your stock’s value can drop quickly—even to a total loss if the company becomes insolvent. To mitigate this, you should diversify by investing in multiple companies. The more diversified your investments, the less your portfolio will suffer from the fluctuations of a single company.

ETFs do this automatically for you. They provide broad risk mitigation by including a variety of stocks. Even if some companies within an ETF underperform, this is usually offset by the better performance of other companies. Overall, the risk associated with ETFs is lower than that of individual stocks, making them particularly appealing to risk-averse investors. However, you should still ensure that the ETF’s top 10 holdings are not overly weighted and that the ETF includes a sufficient number of companies. Our ETF Finder can help you evaluate the top 10 holdings and overall composition of different ETFs.

Who Are ETFs Best Suited For?

Generally, ETFs offer a simple, cost-effective, and diversified way to invest in the stock market, making them especially popular among beginners.

Why Beginners Often Start With ETFs

For beginners, ETFs are often the preferred choice because they require little prior knowledge and allow you to invest in a broadly diversified manner with small amounts. To succeed with ETFs, you don’t need to spend time analyzing individual companies; instead, you invest in an entire market or sector.

Additionally, the passive management costs of ETFs are very low, making them especially attractive to long-term investors. Lower costs mean that more of the returns stay with you, allowing you to benefit more significantly from the compound interest effect over time.

Because ETFs are so straightforward, you should still keep a few things in mind. Ensure that the top 10 holdings in the ETF are not excessively weighted, that the fund’s volume is sufficiently large, and that the total expense ratio (TER) is as low as possible. If sustainability is important to you, also pay attention to the sustainability rating of the ETF.

Many beginners start with an ETF savings plan, where a fixed amount is invested in an ETF each month. This is a simple way to participate in the market continuously and benefit from long-term growth.

Passive Investing With ETFs for Long-Term Investors

ETFs are ideal for passive investors who don’t want to actively monitor the market or trade daily. Since ETFs track an index, you don’t have to select individual stocks. The goal is to follow the market long-term and benefit from its growth. Your motivation isn’t to beat the market with high performance but rather to approach investing as a marathon, focusing on other priorities like developing a good financial routine.

Long-term investors can benefit from market development without worrying about short-term fluctuations. By leveraging the cost-average effect—investing a fixed amount regularly—you can smooth out price fluctuations and average your entry costs.

Can ETFs Be Sustainable?

Yes, there are now many sustainable ETFs that adhere to ESG criteria (Environmental, Social, Governance). These ETFs invest only in companies that follow strict sustainability standards and have a positive ecological and social impact.

Examples of sustainable ETFs include the iShares MSCI World ESG Screened ETF and the Lyxor Green Bond ETF. They allow you to combine ethical values with financial goals while maintaining diversification and cost benefits.

To find sustainable ETFs that align with your personal values, feel free to use our ETF Finder and Impact Check tools.

Who Are Stocks the Better Option For?

This depends on a variety of factors. Individual stocks offer more flexibility and the ability to invest in specific companies for specific reasons, whether that’s interest, expected performance, or a focus on sustainability.

Generally, investing in individual stocks should involve a greater time commitment. This investment type is particularly appealing to experienced investors who are willing to dedicate time to research and analysis.

Why Stocks Are Often More Attractive to Experienced Investors

For experienced investors who know the market well and have the time to thoroughly analyze companies, stocks may be the better choice. They offer the opportunity to invest in specific companies deemed particularly promising or undervalued, potentially leading to higher returns if their assessments are correct.

Investors can focus on specific sectors or companies they believe will experience strong growth in the future. However, this also requires a good understanding of the market, as this approach carries higher risk.

Active Investing With Stocks: What You Should Know

Investing in individual stocks is known as active investing and requires greater involvement and market knowledge. As a stock investor, you’ll need to analyze companies, understand financial reports, and stay informed about economic developments. This approach requires time, patience, and a deep engagement with the markets.

While stocks offer the potential for higher returns, they also come with the risk of losses, especially if the company underperforms or faces unfavorable market conditions. Active investing is therefore more suitable for informed, risk-tolerant investors.

Can Stocks Be Sustainable?

Yes, you can also invest sustainably with individual stocks—possibly even more effectively than with ETFs. Why? With individual stocks, you can directly choose sustainable companies to add to your portfolio, whereas it’s a bit more challenging to achieve this with pre-set ETF products.

You can use our Impact Check to assess the sustainability of both ETFs and stocks.

How to Find the Right Mix of ETFs and Stocks

The choice between ETFs and stocks doesn’t have to be exclusive—many investors combine both investment types to benefit from their respective advantages.

One approach is the Core-Satellite Strategy.

The core of your portfolio is the largest, lower-risk, and more stable portion, which ETFs are well-suited for. The core should provide you with long-term, consistent returns and be well-diversified. For example, this part could make up 80% of your portfolio, though the exact weighting depends on your risk tolerance and financial goals.

The satellites are smaller, higher-risk parts of your portfolio. These can include individual stocks, sector-specific ETFs, or even cryptocurrencies. With these satellites, you’re intentionally taking on more risk to achieve higher returns or meet specific preferences, such as sustainability.

Diversification: ETFs and Stocks for a Balanced Portfolio

Combining ETFs and individual stocks can be an excellent strategy to benefit from the diversification of an ETF portfolio while also taking advantage of the targeted growth potential of individual stocks. ETFs provide a broad base and stability, while stocks offer the chance to invest in companies you see as particularly promising.

Conclusion

Whether you should invest in ETFs or individual stocks depends on your goals, risk profile, and level of financial literacy. For beginners and long-term investors, ETFs offer a simple and cost-effective way to enter the market, while experienced investors may benefit from the higher returns available through individual stocks. A balanced mix of both investment types can be a smart strategy to minimize risk while taking advantage of stock market opportunities.