Stocks vs. ETFs: Pros, Cons and Key Differences Explained

If you’re just beginning your investment journey, chances are you’ve heard a lot about the benefits of exchange-traded funds (ETFs) and stocks. If you want to learn more, wondering whether one or the other is a better investment (hint: it depends), you’ve come to the right place. In this article, we’ll explore both asset classes, highlighting the similarities and differences between the two and how to determine which is a better fit for your current portfolio. 

What’s the difference between stocks and ETFs?

Let’s start with definitions. Stocks represent ownership shares in a company. An ETF represents a collection of assets, primarily stocks, bonds as well as other commodities. As we’ll see below, each investment can prove valuable at different times, and a well-rounded investment portfolio will often include a mix of both.

What are stocks & how do they work?

When you invest in a company’s stocks – often publicly traded – you effectively own a piece of the pie, shares in that company. Depending on various factors, your stocks can do well, or they can fall. As a stockholder, you make money when markets appreciate and upon receiving dividend payments.

Typically, a profitable business will see their stocks rise in the long-term, though market fluctuations can influence short-term volatility. That volatility can impact one’s portfolio in big ways which explains why many see stocks as a potentially risky venture.

What are ETFs & how do they work?

An ETF works a bit differently than a stock. For one thing, the fund allows an investor to purchase a large basket of investments representing a variety of asset classes. The stocks within that basket often have a specific focus area — for example, those operating in a specific industry, such as financial companies.

For another, by allowing for diversification across securities such as stocks and bonds, ETFs offer greater flexibility and lower fees than stocks. Many ETFs track the performance of a market index, such as the S&P/TSX Composite, providing broad exposure. They are typically passively managed, making them a popular choice for cost-conscious investors.

Key similarities & differences between stocks and ETFs

As we’ve just seen, stocks and ETFs have much in common. But they also differ in significant ways. It’s important to understand both the similarities and differences when deliberating over which investment makes more sense to you and your needs. The chart below could help.  

When to choose ETFs over stocks (and vice-versa)

Choosing between ETFs and stocks depends on your comfort with risk, your investment experience, and how hands-on you want to be.

• Prefer diversification and lower fees? ETFs may be ideal.
• Enjoy researching companies and customizing your portfolio? Stocks could be a better fit.
• Want a mix? Many investors hold both to balance risk and return.

A balanced portfolio often includes both ETFs and stocks, helping you manage risk while pursuing long-term growth.

How to start investing in stocks or ETFs

Are you the type of investor who would enjoy some handholding upon venturing into this new, uncharted journey? Or do you prefer your independence, opting to do all the work – research, strategy etc. - on your own? Of course, you may fall somewhere in between, wanting some guidance – but not too much so as to undermine your agency.

No matter where you land on that independence-handholding continuum, you can find an approach that suits your comfort (and trepidation) level. The following resources can help.

BMO InvestorLine Self-Directed & BMO InvestorLine adviceDirect both valuable online platforms that allow you to invest with ease. If you’re more knowledgeable about investing and are looking for complete control over your trading, the Self-Directed platform will be your best bet (worry not, it does also offer some guidance and tips for those looking for just a bit of help).

BMO InvestorLine adviceDirect, meanwhile is a nice alternative as it supports DIY investors while also offering portfolio monitoring and trade recommendations based on your unique needs and style.   

BMO SmartFolio is a good choice for those looking for a more hands-off approach. It offers professionally managed portfolios built with low-cost ETFs, tailored to your goals and risk profile. BMO SmartFolio works like a robo-advisor, but with the added benefit of our team of experts to make the calls.

Remember that the first step of any investment journey begins with determining your objectives and establishing your risk tolerance. Once you have a good, clear-eyed view of your financial goals and how comfortable you are with risk, you’ll have a much better sense of how you’d like your investment journey to look.

Lastly, those new to the world of investing should consider dollar-cost averaging. The strategy involves making investments on a regular basis. This allows you to invest no matter how well (or not well) the markets are performing. The approach can help you save more money over time.

Stocks vs ETFs: which Is right for you?

Before choosing, think about your goals, your timeline, and how comfortable you are with market ups and downs. Whether you choose stocks, ETFs, or a combination of both, make sure your investments support your long-term financial goals.