Want to invest in the water sector? There is a dedicated ETF for that. Interested in quantum computing? Again, there is a solution. The same goes for niche sectors such as specialized energy, cybersecurity, robotics, and artificial intelligence.
ETFs offer a wide range of possibilities and are as easy to buy as a stock. They are simple to understand and their structure is transparent, so investors know all their characteristics: assets under management, benchmark index, management style, fees, weightings, domicile, and dividend policy. Everything is clearly stated.
This abundance of ETFs multiplies opportunities by opening up access to geographical areas or themes that are difficult to reach directly. This is the case, for example, in emerging countries such as India and China, or in sectors where the leaders remain difficult to identify (or too numerous to be chosen individually), such as biotechnology, cloud computing, and insurance. This abundance also requires careful selection and vigilance, as not all products are equal and attention must be paid to certain key points: fees, which must not be too high or they will eat into performance, and assets under management, which reflect liquidity. A small ETF may be more vulnerable to sudden market movements and investors may find it difficult to sell their shares.
That said, these constraints are relative. It is logical that the management company should be remunerated for designing, maintaining, and adjusting the product, ensuring regulatory compliance (auditing, compliance, accounting), and holding the assets with a custodian. As for the issue of liquidity, it is not limited to ETFs: some small caps with low trading volumes are exposed to the same type of risk.
By their very nature, equities carry a risk specific to each company. But that is precisely what makes them attractive: by investing directly, the aim is to outperform ETFs and indices, identify a future gem, or even support a company in which one believes or particularly appreciates.
Furthermore, individual stocks offer a flexibility that ETFs do not have. Regardless of the strategy chosen (growth stocks, dividends, etc.), they allow investors to choose their own themes and how they want to generate performance. With regard to yield stocks in particular, dividends received via an ETF are pooled and then redistributed. This smooths out the result. The generous cash flows of certain companies are diluted by those of less distributive groups, so that investors only receive an average income without being able to choose their sources precisely.
On the other hand, this freedom of choice requires monitoring: analyzing balance sheets, watching the competition, evaluating management strategy, and scrutinizing earnings reports. The slightest news (scandal, debt problem, loss of market share) can weigh heavily and call the investment into question. Conversely, an ETF can be held with greater peace of mind: the risk is diluted among dozens or even hundreds of companies.
In addition, stocks confront savers with their own emotional biases. It is important to avoid becoming too attached to a stock or giving in to panic, for example, during a sharp decline, unless, of course, it is fully justified. This is far from insignificant. Examples include Sartorius Stedim Biotech, Teleperformance, and Navya, a small company specializing in autonomous vehicles. Investors have become so attached to certain stocks that they have lost their objectivity.
However, investing in stocks does not follow a strict hierarchy of experience. Being a professional does not make you immune to mistakes, and being a novice does not prevent you from having flair. Those who, as early as 2007, sensed the upheaval that the iPhone would cause and positioned themselves on Apple were well ahead of many experts who were still confident in Nokia's dominance. Similarly, those who believed early on in the power of Nvidia's graphics processors saw their gamble pay off long before the institutional market recognized the potential of artificial intelligence. In its early days, Netflix, with its DVD-by-mail service, seemed insignificant compared to Disney, Paramount, or Time Warner. However, the group was the first to make the shift to streaming, while the major studios took years to react.
A choice that therefore depends on each individual's strategy...
ETFs are now an integral part of the stock market landscape, to the point where they have become essential instruments. There is a mass effect with the very large ETFs (SPY, MSCI World, Nasdaq 100), which have become so large in terms of assets under management that they are benchmark instruments and directly influence the markets. The Magnificent Seven (Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta) are included in almost all ETFs exposed to the United States.
Consequently, both methods (stocks and ETFs) have their advantages and disadvantages. It all depends on the investor's profile and expectations: some prefer to actively monitor their portfolio, while others seek a more passive and unrestricted solution. The key is to define a clear strategy and stick to it, asking yourself questions such as: Do I want to spend time monitoring my positions, or do I want to worry about them as little as possible? Am I prepared to put up with the volatility of certain stocks, or do I prefer the stability and diversification offered by ETFs? Is my portfolio sufficiently balanced across sectors and geographical areas, or am I too focused on a few stocks? Ultimately, it is a personal choice: both approaches are valid as long as they are consistent with your objectives and investor temperament.
To explore a related topic further: Are thematic ETFs useless?
