Marianne F. from Kent, OH asks: Hello Mitch, I’m writing to hear your thoughts about ETF investing versus owning individual stocks. I’m in my late 40s and don’t want to get too sophisticated with my investments. I just want something that works and is relatively easy. Thank you.
Mitch’s Response:
Thanks for writing, Marianne. I think there are a lot of investors thinking along the same lines as you. In fact, I know there are – since the first passive index ETF was created, the total amount of US assets invested ‘passively’ has soared past $11 trillion, and there are now more passive investors than active ones. As of March 2021, passive index funds (all mutual funds and ETFs) share of total invested assets is close to 52%.
Investor interest in passive ETF investing is growing for good reason, in my view. ETFs allow an investor to gain broad diversification at a low cost, which is two advantages over the long term. If an investor’s goal is to be the market, but not beat the market, then that investor can implement a passive approach by selecting a benchmark and committing to it for their entire investment horizon.1
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But I think there are some big issues with this approach that many investors may not recognize or acknowledge. For one, I’m not sure many investors actually stick to the same ETF strategy and benchmark over long periods of time. I often see portfolios made up of many ETFs, which tells me that ‘passive’ investors are acting as active investors without necessarily knowing it.
Actively managing an ETF portfolio can be good – we do that here at Zacks Advantage. But we also have decades of experience in research-driven decision making, and we review and analyze our decisions regularly. Based on your question, it doesn’t sound like you’re up for that.
Another issue is investor psychology. Doing ETF investing well involves picking a benchmark and sticking to your ETF strategy long-term. It does not mean trading in-and-out of ETFs when the market exhibits volatility or if market conditions suddenly change. For many investors, the temptation to shift around can run interference with an ETF strategy, which may ultimately mean not generating the long-term results you want and also underperforming the benchmark.
A final issue is with taxes. If this is a retirement portfolio where taxes are deferred, passive investing does not have to be an issue. But for taxable accounts, having ETFs does not give an investor much leeway for tax-loss harvesting and other strategies designed to control capital gains.
These are some of the issues I would encourage you to consider before committing to an all-ETF strategy, and it could make sense to establish some guideposts and investment disciplines before proceeding. At Zacks Investment Management, our goal is to deliver long-term results by actively managing our investments based on a research-based approach, and Zacks Advantage does the same thing but with ETFs. Both approaches are driven by decades of experience in research.
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