Investors need a thick coat this year. As a result of the corona uncertainties, there were massive price drops, and the stock exchanges continued to fluctuate strongly. But which investors have come through the crisis better so far: equity holders or ETF investors?
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• Investors in any strategy have recently suffered losses
• ETF investors with lower volatility and lower costs
• Index funds cannot outperform the market, but neither do they run worse
Stock exchange champion Warren Buffett is a fan of index funds. By investing in an ETF that tracks the S&P 500, the old master even struck a hedge fund over ten years and won a bet of $ 1 million.
The stock market legend does not tire of bringing private investors closer to the advantages of index funds. “Fire your fund manager,” Buffett called for in 2017, advising investors to use low-cost index funds.
Shares or ETFs – who coped better with the carnage?
But Buffett also has a bloodbath like the international one Financial markets experienced in the past few weeks, so probably not foreseen. Numerous asset classes have swept across the board – individual stocks as well as index funds. But for whom was the total loss lower?
The fact is: there are no risk-free investments during a market crash. Accordingly, all investors have felt the consequences of the downward movement. Even those who have diversified their assets by investing in an index fund because they have invested pro forma in numerous individual shares were also hit by the downward pull. The ETFs fell in line with the indices – no more clearly, but no less clearly.
Investors who invested in individual stocks had to endure significantly higher volatility in the past few weeks because individual stocks are subject to much larger price movements than index funds. While some shares defied the market and lost less than the broad market and there were even a handful of winners, many other shares went much lower than the DAX, Dow Jones, S&P 500 & Co.
Anyone who diversified their portfolio well could compensate for large losses in individual shares by less severe slumps in other share certificates – provided that their portfolio had already been set up sufficiently in advance. It may even be better for individual value investors than for the broad overall market, but hardly any investor has been able to avoid losses in the market environment of the past few weeks.
Cost structure speaks for ETFs
The diversification that index funds offer is difficult for investors with single shares in the portfolio to replicate, as experts emphasize: “If you select individual shares, you have to do it individually – and possibly buy 20, 30 or 50 shares. You have to work a lot more and take the necessary care, “quotes Yahoo Finance Arielle O’Shea, investment expert NerdWallet. Tony Ogorek, President and Founder of Ogorek Wealth Management, also believes that ETF investors can invest with significantly less effort: “Instead of trying to figure out which companies will be the winners, just buy the index.” So you avoid corporate risk and spread your investments.
In addition to the strong diversification that investors can only replicate in individual shares through careful research, regular custody account adjustments and a lot of time, the cost structure also speaks for an investment in index funds. The fees for ETFs are relatively low, so investors ultimately have more money to invest. When purchasing individual shares, however, an order fee is often due – for each trade.
In addition, investments in index funds eliminate another problem that equity investors often have: not being able to separate from a stock – for example, because they believe in a turnaround or have already made excessive losses. Index funds that fully track an index do not have this problem – if a share flies from the index, it flies from the ETF. The reverse also applies: stocks that investors would not deposit in the custody account for various reasons are part of the index. This minimizes the risk of making emotional investment decisions.
Market cannot be surpassed
Meanwhile, investors in index funds do not have the chance to drive their own investment better than the market. Even in strong stock market times, ETF investors will not perform better than the underlying index. In weak stock market times, however, they will also perform no worse than the broad market.
However, only investors who invest in individual unit certificates have the chance to beat the market. Especially if they have companies with a unique selling point in their portfolio that could go off in the future. Tech value investors with individual shares who have invested in the FAANG Group in recent years are likely to have outperformed the market overall.
So if you put the time and effort into the research and also don’t shy away from the trading costs, an investment in individual shares can be worthwhile. It should also be noted that the investment risk increases at the same time.
Those who choose the ETF strategy meanwhile limit their risk and costs – but also their chance to perform better than the broad market. No investment strategy is immune to losses, as recent market developments have shown.
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