A. ETFs and Stocks are similar in many aspects. For example, both ETFs and Stocks:
- Can be traded real time
- Can be bought on margin
- Can buy or sell options
- Can be short
However, just like when we compare ETFs with Mutual Funds, we find each has some advantages and disadvantages. When compared with Stocks, ETFs offer some advantages and disadvantages too.
Here are major 2 advantages of ETFs over Stocks:
1. Less volatile
ETFs cover a basket of stocks, such diversification lowers its risk than individual stocks. This is especially important for investors who want to buy stocks in some risky industries such as biotech industry - usually one new drug can make or break a company, unfortunately you don't know which company and which drug will make or break. In this case, Biotech ETFs offer a safer way to play in such risky sectors.
2. More efficient
For industries that are stable or very mature, the companies in that industry tend to have narrow range of returns. In this case, it's better not to spend your time researching individual companies, instead, just buy the sector ETFs. Utility is one such industry.
In our next blog post, we will discuss 3 disadvantages of ETFs over Stocks.