ETF vs. Stock: What’s the Difference, And Which One Should I Buy?

  • ETFs can be safer than stocks, depending on the circumstances
  • New investors are often recommended to start with ETFs
  • ETFs can be a great way to invest in emerging sectors

It’s easy to get bewildered by all the different investment terms and options ahead of you, especially if you’re new to investing. One of the questions that crops up frequently is about the differences between ETFs vs. stocks, and which one is better for investors.

Here’s a quick overview of the thorny ETF vs. individual stocks dilemma.

What is the difference between ETFs and stocks?

When you buy an individual stock, you’re buying a share in one company. But an exchange traded fund, or ETF, operates like a basket of multiple stocks, so you get a slice of numerous different companies. Unlike stock, you don’t own shares of the company the ETF is invested in but shares of the ETF itself.  The ETF uses your investment capital and invests it according to the investment objectives outlined in its prospectus or other offering materials.

You can invest in an ETF that tracks a specific index, like the S&P 500; one that follows a sector like oil and gas; or ones with specific ideologies, like ETFs in women-led companies.

ETFs and individual stocks both trade on stock exchanges in a similar way, and you can usually buy and sell them both through the same brokers. Stocks and ETFs are both considered liquid, meaning that you can buy and sell them directly.

Are ETFs safer than stocks?

To some extent, yes. With an ETF that invests in equities (stocks), your investment is diversified across a number of stocks, so if one performs poorly, it might be offset by other stocks. “If you own an ETF, you eliminate the risk of total loss,” says Don McDonald, host of the podcast Talking Real Money1.

ETFs are usually passively-managed through an algorithm, but actively-managed funds are at risk of human subjectivity. Even professionals can fall prey to bias. The S&P Dow Jones Indices reports that actively managed large-cap funds underperform the S&P 500 nearly 83% of the time, showing that when humans pick the stocks, they don’t always get it right2.

That said, ETFs don’t come with a guarantee.

Are ETFs better than stocks?

Whether ETFs vs. individual stocks are a better investment choice depends on your goals. You might make a bigger profit with individual stocks vs. an ETF, because if you select the next Amazon and the price skyrockets, you’ll gain all the profit from that price increase.

If you trade individual stocks through a trading platform like RobinHood or an online broker, your trading costs are probably low, but ETFs come with fees. However, these should be low too, especially compared to other investment vehicles like trust funds, because lower cost (expense) ETFs are generally passively managed. Check the expense ratio before picking your ETF; for example, an ETF with an expense ratio of 0.05% costs you 5 cents for every $100. Expense ratios are just one of many factors to consider when considering ETFs, and shouldn’t be your sole basis for making an investment decision.

Some ETFs are seen as being more tax-efficient, because of the way they are structured, so if you’re concerned about your tax footprint, you might prefer these types of ETFs. But if you’re investing in stocks within a specific framework, like an IRA or 401(k), that won’t be an issue because of the tax-deferred or tax-free growth of these types of accounts

Who should invest in an ETF vs. stocks?

New investors who are getting their bearings

Often newbie investors try investing in ETFs vs. stocks while they become familiar with the industry, landscape, terminology, etc. “New investors, while excited to learn, can all too easily fall prey to beginner investing mistakes like analysis paralysis when trying to weigh the pros and cons of each investment vehicle,” observes Harlan Vaughan at NextAdvisor3.

Anyone who prefers a hands-off investment

Some people want to broaden their savings portfolio with stocks and shares, but they don’t have the time, interest, or expertise to research stocks and seek out the best options. They want a passive, low-fee investment option that gives exposure to a sector, without making demands on their time.

People looking for a long-term investment

Different people have different approaches to stock market investing, with some looking to speculate with volatile stocks in the hopes of making a quick profit, while others see it as a long game. ETFs are generally recommended for people who are in it for the long haul, although individual stock trading can also be done for long-term investments. 

Who should invest in stocks vs. ETFs?

People who enjoy the excitement of active trading

If you like to be in control of every aspect of your stock trades, you’ll prefer buying and selling a stock vs. an ETF. The same goes for investors who enjoy the challenge of seeking out the best performing or most volatile stocks, and like the adrenaline rush of watching stock prices rise and fall each day. 

People with expert knowledge

If you have inside or expert knowledge about a specific industry or sector, your insight could help you spot the factors that make a company likely to succeed or fail. Likewise, if you know a particular company well, you might notice the signs that it could rise or fall before the rest of the market, helping you outperform an ETF. 

When should I invest in an ETF vs. a stock?

When it’s an emerging sector

ETFs offer a great way to get in early on an emerging, volatile sector, where the potential is high but hasn’t yet translated into tangible payoffs, like Defiance’s HDRO ETF in green hydrogen. There are many reasons to feel confident that the green hydrogen market is going to take off , but it’s difficult to know which of the many competing young companies will succeed.

An ETF gives you exposure to a broad range of companies within the sector, helping you benefit when the market rises, while protecting you from losing everything on a gamble that doesn’t pay off.

When the risks are high

In some sectors, a single event can make or break it for a company. This is the case for psychedelics at the moment. If the FDA approves one company’s formulation, its share price could skyrocket, but if it’s rejected then the company could fold.

A psychedelics ETF like PSY from Defiance spreads your investment across more potential companies, diluting the risk of backing the wrong contender.

When it’s hard to identify drivers of success

Some promising sectors are based on complicated technology or processes that are difficult to understand, making it hard for investors to predict which companies will soar and which will plummet.

Quantum computing is a good example; the industry offers a lot of potential,  with GMI forecasting that the quantum computing market will exceed $5 billion by 20284. But the average investor struggles to understand whether company X’s qubit methodology is better than company Y’s. Investing in an ETF like QTUM helps you benefit from those stocks that succeed, even if you don’t know why.

When the dispersion of return is narrow

As explained by finance expert Brian Beers, some markets have a narrow dispersion of return, meaning that lots of companies are expected to rise together and there won’t be just a handful that outperform the rest.

For example, the travel sector is widely expected to bounce back this year, but it’s hard to identify a few specific stocks that will tower over the others. In these cases, he advises, “picking a stock does not offer a sufficiently higher return for the risk that is inherent in owning individual securities.”5 Defiance’s CRUZ ETF offers an option for diversifying investment across the industry.

When there’s no direct way to invest in a sector

There’s a massive amount of buzz around NFTs, which are represents digital ownership of almost anything that can exist on the blockchain, but not everyone wants to buy their own NFT. However, there aren’t any real NFT stocks which let you dip your toes in the market. An ETF like Defiance’s NFTZ covers a number of companies that are involved in the NFT ecosystem, that is companies who earn a portion of their revenues from activities of this digitally interconnected system, usually involving activities in the blockchain and crypto currency related activities.   

ETF or individual stocks: the choice is yours

Ultimately, the most important difference between an ETF vs. a stock depends on your expertise, preferences, and appetite for risk. If you’re looking for safer investments, new to investing or considering emerging markets with narrow dispersion of returns, high risks, and few drivers of success, ETFs vs. stocks could be a better bet. However, people who enjoy living on the wild side and/or have expert knowledge about the sector might do better with individual stocks vs. an ETF.

Like with every financial decision, it all depends on you.

For current performance and holdings, please visit defianceetfs.com/HDRO

For current performance and holdings, please visit defianceetfs.com/PSY

For current performance and holdings, please visit defianceetfs.com/QTUM

For current performance and holdings, please visit defianceetfs.com/CRUZ

For current performance and holdings, please visit defianceetfs.com/NFTZ


1 “Why Investing in ETFs Is a Better Strategy Than Picking Individual Stocks, According to Experts” February 9, 2022 https://time.com/nextadvisor/investing/individual-stocks-vs-etf/

4 “Why Investing in ETFs Is a Better Strategy Than Picking Individual Stocks, According to Experts” February 9, 2022 https://time.com/nextadvisor/investing/individual-stocks-vs-etf/

3 “Why Investing in ETFs Is a Better Strategy Than Picking Individual Stocks, According to Experts” February 9, 2022  https://time.com/nextadvisor/investing/individual-stocks-vs-etf/

4 “Quantum Computing Market Size, Growth Forecasts 2028” October 2021 https://www.gminsights.com/pressrelease/quantam-computing-market

5 “Stock vs. ETF: Which Should You Buy?” January 12, 2022 https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp