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My situation: I am mostly interested in long-term dividend-paying investments. My philosophy is "only sell if the company becomes fundamentally worse", so I only pick stocks of companies I feel comfortable being an owner of.

The consensus seems to be that for long-term investments, ETF trackers are better than individual stocks mainly for the following reasons:

• "You can't beat the market";


• Easier and cheaper to invest in foreign countries or specific sectors;


• Lower risk;


• Historically better than individual stock investments.

However, I am not fully convinced by ETF Trackers in the current context, for various reasons:

• Reading things like "buy ETFs and earn money easily and passively" or "people are buying ETFs more than ever", make me worried. If I start reading that "ETFs are the new paradigm", I'll think that a market crash is imminent.




• Why not make my own portfolio? I could simply look at the stock ratios of the major ETF trackers and buy stocks with similar ratios. [Note that this is assuming that there are no significant fees for doing that, so that would mean European stocks for me].




• I like to be able to reinvest the dividends as soon as I get them.




• I have the liberty to buy / sell any stock.




• Finally, it just seems too easy. If "everyone" starts thinking that with ETFs they are going to be rich, things will go wrong sooner or later.

So, are ETF trackers fundamentally better than individual stocks? Am I missing something important here? Or is my gut feeling just wrong?

Note that there is always the possibility of having both stocks and ETFs, but this would be pointless if ETFs are fundamentally better.

I am mostly interested in long-term dividend-paying investments.

Why only dividend stocks? The value of a stock goes down when they pay a dividend, so dividend stocks are (in my opinion) more appropriate for short-term income needs. Long-term you should be looking at total return (dividends + price growth). Plus, capital gains are taxed less if the stock is held for more than one year (this does not matter if you're talking about a tax-deferred account).

"You can't beat the market";

This is a theory that only applies to long-term diversified investing. Certainly individual stocks can perform better then the market, but the more you diversify, the closer you get to "market" performance.

Historically better than individual stock investments.

Again, there are individual stocks that outperform ETFs - ETFs just are more diversified, resulting in more of an average return.

If I start reading that "ETFs are the new paradigm", I'll think that a market crash is imminent.

Well, remember that ETFs just contain stocks within them, so I don't see how ETFs can be "overbought" (which would be the premise of a market crash) without the individual stocks being overbought.

Why not make my own portfolio? I could simply look at the stock ratios of the major ETF trackers and buy stocks with similar ratios.

Many ETFs contain hundreds of stocks. I suspect that transaction fees would be significantly higher, plus it would be a lot more work on your end.

I like to be able to reinvest the dividends as soon as I get them.

Many brokers will do this for you, even with ETF.

Neither one is "fundamentally better." Picking stocks is hard, which is one reason why good asset managers make millions of dollars. There's nothing wrong with using ETFs as easy diversification and to avoid the hard work needed to pick "good" stocks. But it is possible to beat them with your own stock selection (and probably a little luck :-) )

The quick and dirty answer to your question is no.

An ETF is not company equity. Is pizza fundamentally better than pepperoni?

When you dig deeper in to the "you can't beat the market" it's REALLY about fees. Passive index tracking funds, either exchange traded or mutual funds, have low fees. If I can buy an actively managed fund that seeks to beat the S&P500 by also only holding large cap US company stock for an expense ratio of 0.9%, why not buy the index ETF for 0.04%? The active fund would have to beat the S&P500 by 0.86% every single year for 40 years and that's just statistically unlikely.

When you read the "active managers can't beat the market" what's often left out is "net of fees." Bridgewater's Alpha Fund has done very well against the S&P500. In fact, the alpha fund 2018 return was +18.5% compared to -4.5% from the S&P500. But, when you look over an extended timeframe and consider your actual and expected costs there's a different story.

ETFs are not all the same. ETFs are not "lower risk" by default. An oil ETF has a materially different risk profile than SPY. BUT, buying and rolling over your own oil futures contracts will take a lot of capital to start and likely carry costs in excess of just buying USO. Investing in Brazilian companies, or the Japanese Utilities industry, is difficult and expensive to do as an individual. I'm sure there are ETFs for both.
Will these ETFs "beat the market"? Maybe, but they're not designed to. All ETFs are not broad index tracking ETFs, a lot of funds will follow some theory. You need to read the prospectus for the fund and find out what it's doing.

Many discount brokers have a list of Mutual Funds and ETFs that they will trade for no cost. Getting the money in to the market with no cost, in to a broad market index tracking fund with basically no maintenance fee is hard to beat. If you have a low trading commission of $5 per trade, but you want to routinely invest $250 every other week, you give up 2% of your investment off the top. Over a long time frame it is extremely unlikely for you to beat the market return and a 0.04% expense ratio when you give up 2% of all of your invested dollars; ignoring the fact that you will eventually have to sell these investments and incur sale commissions too.

TONS of people beat the market. A friend of mine bought too much Netflix when it was $15 or $20 per share. She has crushed the market. It was by accident, and too much of her wealth is in Netflix, but she has beaten the market to death. Can you routinely pick the Netflix out of all the potential investments? Probably not.

A couple books I would recommend are "A Random Walk Down Wall Street" and "The Money Game." Most people don't have the emotional fortitude to really handle their own investments. Most of what you will read as investment advice is directed at those folks. If you've got your proper emergency fund, got your retirement funds and contributions on track, and you understand the risks of investing in the particular thing you're deciding to invest in, go for it.

Can you beat the market by actively trading your own retirement fund? Probably not, but that doesn't mean you shouldn't keep your own brokerage account and make some investment decisions for yourself while your long term money sits in low cost market index funds.

Let's break this down into some of your premises and some of the external premises you seem to believe in:

• You seem to be a fundamental analyst/investor.


• You want to buy and hold, only selling a company if it gets fundamentally worse.


• You want to own parts of a company, not just speculate with them.


• You are interested in dividends, which is the way a businessperson looks at it, and also some investors.

With that said, you seem to look more at the business side of things than the speculative side of things. You want to be a businessperson that owns a fraction of ownership of a company, looking at it exactly the same way a businessperson with a big share of a company would look at.

Now I'd like to discuss two of your ETF premises that I disagree with:

• You can't beat the market.


• If "everyone" starts thinking that with ETFs they are going to be rich, things will go wrong sooner or later.

First of all, you absolutely can beat the market. You can't beat the market if you don't know how to analyze it and make decisions. A quick trip to the library will prove that thousands of people have beaten and continue to beat the market everyday. An uneducated person can't beat the market in the long term, that's for sure. Someone with no interest in investing can't beat the market. ETFs are great for these folks.

Second of all, things shouldn't necessarily go wrong if "everyone starts buying ETFs" (I'd agree with the statement if you were talking about individual stocks), due to the principle that ETFs track indices, which typically somehow track the economy as a whole and all economies grow in the long term (note the "long term"). The nature of any economy is to grow, so if an ETF gets hit really hard and it tracks an index, the index probably is getting hit really hard as well. If the index is a broad one (e.g. S&P 500), it probably means the economy, in turn, is going down. Well, there have been several crises in history but the economy has always bounced back. You may lose a lot of money for months or even years, but it does bounce back simply because it's the nature of any economy to grow in the long term. I particularly believe that, if the global economy (or any economy for that matter) goes down really hard in the really long term (which would materialize your belief that too many ETF investors are a bad thing), then it's the end of the world as we know it and it no longer matters whether you have money in ETFs or not (think what would happen if the S&P 500 went down 50% and stayed there for 15 years).

With all that said, and from what I could tell about you through your question, here are my two cents:

• You can beat the market if you pick and choose the right stocks. You seem to want to do exactly that.


• Imagine if, ten years ago, you really believed Amazon's mission and proposal. You knew the tech industry, you did the math, you analyzed Amazon's fundamentals, and made a life-long decision to invest €40,000 in it. Today, you'd have over €1,000,000.00. If that's not beating the market, I don't know what is.


• ETFs are a great way of diversifying and therefore reducing your risk. This is great if you don't have the time or interest to invest.


• Diversifying means you will inevitably go with a certain industry or the whole economy, depending on what your ETF is tracking. Note that this can be good or bad.


• As a businessperson, you may want to analyze dozens of fundamental criteria and business criteria and make a decision on only a few or half a dozen stocks, and that's OK. As I implied above, it is exactly like having some money saved over and then deciding that you want to open a bakery or a smartphone app startup: you put money into a business and you expect returns from it. Except that you own maybe 0.001% of a company worth 10 billion instead of owning 100% of a company worth 100 thousand. I suggest doing an internet search on what Warren Buffett has to say about diversification.


• You can still "get rich" buying ETFs, just not as rich as you would if you bet on the right company.


• In the long term, you are more likely to make a lot more or lose a lot more by creating your own portfolio than by buying an index-tracking ETF.

As someone with a similar profile and similar goals as you, I have made the decision to fundamentally analyze the market and buy stocks myself.

The next will be just my humble opinion.
Because few dozens shares randomly choosen from wide spread market show the same gain in the long term (so as all the indices: Dow, SP500 etc), I don't think, that fundamentally you'll win or loose anything. But ETF provide you wider diversity of shares. Suppose, you have 30 types of stocks in your portfilio. Then if one of them suddently goes bankrupt (e.g. like it happend with Enron), then you'll lose 1/30 of your porfolio, which is ~3% of assets. On the other hand, ETF has hundreds or thousands shares, so loosing one company is nothing.
You've mentioned no significant fees with your way of investing. It'd be great not to have to paying commission, but do you really in such situation? Funds like Vanguard usually take lower commission than you can reach investing on your own.
the liberty to buy / sell any stock is rather disadvantage for me. Because in this case you have temptation to sell or buy the stocks. And in most cases it's a way to loose money rather than earn it.

"everyone" starts thinking that with ETFs they are going to be rich I suppose it's a wrong attitude to the market. In my opition, investing helps to avoid becaming a pauper rather than become rich.

There are wide range of ETFs, in the context of your question, I assume you're talking about passively managed ETF that tracks an index (e.g. S&P 500).

Are index ETF fundamentally better?

The short answer is no, it's just a market average, but I will say it's one of the most amazing invention if you look at it from the historical context.

According to my quick google search, it was 1975 when John Bogle first invented low fee index mutual fund, and the first S&P 500 ETF (SPY) was not created until 1993.

Imagine you are a small investor in 1975 and wanted to invest in stock (in a diversified way), what were your choices? Discount electronic brokers were not available (Etrade was founded in 1982), human brokers commission were expensive, shares were mostly traded at multiple of 100 shares (and it didn't make sense to trade less because of the commission anyway). All of these were barriers to you, as a result, your only reasonable choice was probably put your money to a mutual fund, accepted whatever fee they charge, and pray for the manager doing a good job for you. Low cost index fund offered you a second simpler and likely better choice at that time.

Are index ETF still better than individual stock nowadays for the reasons you list?

Let's see.

"You can't beat the market";

Although I cannot be completely sure, if "the market" means S&P 500 imo it's easy to beat by screening off some bad companies from S&P 500 (Use an online screening tool, cross out companies that have low revenue growth & no dividend & low historical return & whatever reasonable criteria you want to use) and diversified your portfolio among others.

The simplest examples are DIA and QQQ (ETF that tracks Dow and Nasdaq), they both beat SPY by about 1% a year (Use this to check) on average for 20 years, both are indices that track fewer number ( and therefore slightly higher average quality) of companies.

I am confident that you can do even slightly better by picking stocks yourself rather than following another index.

Easier and cheaper to invest in foreign countries or specific sectors;

Yes these are main reasons I use ETF to invest in foreign equities and junk bond market.

Lower risk;

This is a common misconception. Because most stocks are positively correlated with correlation coefficient about 0.2~0.5 (Use this to check). As a result diversified yourself in 500 companies is not going to lower the variance of the portfolio by much compare to diversify in 20~30 companies.

Historically better than individual stock investments.

This is not well defined, depends on which stock you compare to.

Why not make my own portfolio?

I am using almost exactly the strategies you describe with my little ~$10000 portfolio in a 0 commission brokerage account now, so yes imo it's at least worth a try. :)

Keep in mind though,

1. Bid-ask spreads, and exchange clearing fees are still small hidden fees.




2. When you re-balance portfolio by selling something for a profit, you have to pay tax.




3. It might be more valuable to put time into work, career development, etc. instead of researching how to beat S&P500 by a few percent on a small size portfolio. :)

Cheer!