Should I buy individual stocks or ETFs? A guide to long-term growth
In this article
One of the most common questions investors have is whether to buy individual stocks or invest through ETFs. Both approaches can support long-term wealth building, but they work differently, and which option you choose depends on your individual situation and preferences.
Why this question matters for long-term investors
Both individual stocks and ETFs can play a role in long-term growth. With stocks, the focus is often on choosing companies you believe will outperform. With ETFs, it’s about gaining diversified exposure.
Time, behaviour and consistency matter more than picking the right option on paper. The best approach is the one you can stick with through market ups and downs. It’s one of the reasons ETFs are a popular choice for Canadian investors.
ETFs or individual stocks: Three questions worth answering before you decide
Before diving into a detailed comparison, asking yourself a few key questions can help you see which approach may fit better:
How much risk can I absorb?
If a significant drop in portfolio value would cause you to react emotionally or lose sleep, you may find that ETFs feel more comfortable, as their built-in diversification helps reduce the impact of any single company that may be struggling. With individual stocks, risk is more concentrated, and that concentration can work for or against you.
How much time do I have?
Stock investing requires ongoing research into company financials, competitive dynamics and industry trends. ETFs, on the other hand, offer a more structured approach, without requiring the same level of company-level analysis. If time is limited, ETFs can help reduce the need for ongoing monitoring, depending on the ETF.
What am I trying to achieve?
If your goal is long-term wealth building with minimal complexity, broad market ETFs are often a natural fit. If you prefer to focus on specific companies you believe will outperform, individual stocks offer that targeted exposure but can also carry more risk.
What it means to invest in individual stocks
When you invest in stocks, it means you buy shares in specific companies. For instance, when you own shares in a Canadian bank or a technology company, you own a piece of that business, and your returns are directly tied to how that company performs.
Like with anything, there are advantages and trade-offs when it comes to investing in individual stocks. Some potential advantages include focused exposure to companies you believe will outperform, direct control over what you own, a lack of ongoing management fees and the ability to customize your portfolio around your convictions.
There are also trade-offs to consider. Concentration risk means that if a few holdings perform poorly, your portfolio can be significantly impacted. Stock investing also often requires ongoing monitoring and can introduce emotional decision-making during periods of volatility, which is often when the costliest mistakes can happen.
What it means to invest using ETFs
When you invest with ETFs, you buy a fund that holds many securities. A single ETF might contain hundreds or thousands of stocks and bonds, providing instant diversification.
Some of the potential advantages with ETFs include diversification, which helps reduce the impact of any single company’s performance, simpler portfolio management and typically lower fees than actively managed mutual funds. This is part of why ETFs are often considered building blocks for a balanced portfolio.
While there are fewer decisions to be made with ETFs, there’s also less control. You accept the returns of the group rather than trying to identify standout companies. For some investors the simple structure of an ETF is a plus. For others, it feels like leaving potential on the table.
Stocks vs ETFs for long-term growth
Diversification and risk
Individual stocks: Risk is concentrated. For example, if you hold 10 stocks and one company goes bankrupt, you lose approximately 10% of your portfolio.
ETFs: Risk is spread across dozens or hundreds of companies, so if one company in a broad ETF fails, it represents a small fraction of the fund's value and the impact on your overall return is minimal.
Time and effort
Individual stocks: Investing requires research and monitoring of company financials, industry trends and competitive dynamics.
ETFs: You get structure without requiring deep company-level analysis. You choose a fund based on its strategy and let the fund handle the rest.
Behaviour during volatility
Individual stocks: You may face the temptation to sell individual positions during market declines or chase recent winners.
ETFs: You may experience market volatility, but without the company-specific drama that can often trigger reactive decisions.
How costs differ between stocks and ETFs
If your brokerage charges trading commissions, each stock purchase comes with a cost. Building a diversified portfolio of individual stocks can involve multiple transactions and, as a result, multiple commissions. There’s also the opportunity cost of mistakes: a stock that significantly underperforms can impact your returns, even though it doesn’t appear as a fee.
ETFs charge management expense ratios (MERs) that cover the cost of running the fund. These are typically lower than mutual fund fees but higher than owning stocks directly, where typically there isn’t an ongoing management fee. You might also pay trading costs when buying or selling ETF units.
Whether the MER is worth the diversification and built-in management depends on how you value your time and how comfortable you are with concentration risk. For many investors, paying 0.10% to 0.50% annually is a reasonable trade.
Using stocks and ETFs together
You don’t have to choose exclusively between individual stocks and ETFs. Many investors combine both approaches using a core and satellite structure. ETFs form the foundation for broad market exposure, and individual stocks are added as targeted positions where they have high conviction or, simply put, investments in companies they strongly believe in.
A common version of this is holding 80% or more of your portfolio in diversified ETFs for stability and long-term compounding, while allocating a smaller portion to individual stocks you choose. This limits the damage if your stock picks underperform, while still giving you the ability to participate in specific opportunities.
Stocks vs ETFs in different account types
In a Tax-Free Savings Account (TFSA): Both stocks and ETFs work effectively because growth in a TFSA is tax-free. However, concentration risk in individual stocks can have an impact if a position loses significant value, since there’s no tax loss available to offset gains elsewhere.
In a Registered Retirement Savings Plan (RRSP): Designed for long-term growth, RRSPs can suit both approaches. ETFs may be simpler for investors who want to set a strategy and let it compound over decades without ongoing decisions.
In non-registered accounts: Tax complexity increases with individual stocks because you’re responsible for tracking the adjusted cost base of each position (each stock you own). ETFs simplify this considerably since you track one position instead of many.
How do you decide whether to invest in stocks or ETFs
Individual stocks are often the go-to for investors who enjoy researching companies and following industry trends or have specialized knowledge in specific sectors. They’re also comfortable with concentration risk and the time commitment that comes with active monitoring.
ETFs are often chosen by investors who want diversification without having to spend time on extensive research or monitoring, and value a structured and low-maintenance approach.
Combining both is an option for many investors looking for a middle ground. This approach often includes holding ETFs for core exposure and selectively adding individual stocks, either across different accounts or within the same portfolio.
Common misunderstandings about stocks vs ETFs
It can be easy to fall into “either-or” thinking when comparing stocks and ETFs. But many of the most common beliefs about them aren’t entirely accurate or only tell part of the story. Understanding what’s myth versus reality can help you make more informed decisions about how each fit into your investment approach. Here are some of the most common misconceptions:
"ETFs are only for beginners."
ETFs are used by investors at all experience levels, including institutions and sophisticated investors. Many investors see the simple structure of ETFs as a plus, not a limitation, because they free up time to spend on other priorities.
"Stocks are always riskier."
Individual stocks carry higher concentration risk, but risk depends on how you construct your portfolio. A well-researched, diversified portfolio of quality stocks may behave differently than if choosing many stocks from a volatile sector. Risk comes from concentration, volatility and how you respond to market moves, not purely from the investing option you choose.
"ETFs mean giving up control."
While you give up control over individual holdings, you retain control over your overall strategy. You choose which markets, sectors or asset classes to hold. You control when to buy, sell and rebalance. With ETFs, you’ll have less control at the company level, but not the portfolio level.
Frequently asked questions (FAQs) about stocks vs ETFs in Canada
Are ETFs safer than stocks?
ETFs are generally less risky than individual stocks due to diversification, but it often depends on the specific ETF and stocks being compared. A broad market ETF holding hundreds of companies is less risky than owning a few individual stocks because the impact of any single company struggling can be minimal.
On the other hand, a sector-specific or leveraged ETF can carry more risk. How your portfolio can mitigate risk depends on its diversification and approach to risk management rather than the type of investment.
Can I beat the market with stocks?
It’s possible but challenging. Research consistently shows that most individual stock pickers underperform broad market indexes over time, especially after accounting for trading costs and taxes. Success requires skill, discipline, significant time for research and the emotional control to stay with a strategy during downturns. If you choose this path, understanding the commitment required is important before you start.
Are ETFs good for long-term growth?
Yes, broad market equity ETFs that provide exposure to hundreds or thousands of companies can be effective for long-term growth. The key is choosing the right ETF for you and your goals, maintaining a consistent strategy and staying invested through market cycles rather than reacting to short-term volatility.
Should beginners start with ETFs or stocks?
ETFs are often recommended for beginners because they provide built-in diversification, require less research and reduce the risk of costly mistakes from inexperience. If you’re genuinely interested in learning about individual companies and willing to invest the time in research, starting with a small stock allocation while building knowledge can work. The important thing is to understand what you’re buying and why, regardless of the approach.
Can I switch from stocks to ETFs later?
Yes, in registered accounts like TFSAs and RRSPs, you can sell stocks and buy ETFs and your investments will grow tax-free (TFSA) or tax-deferred (RRSP). In non-registered accounts, selling stocks triggers capital gains or losses that must be reported to the Canada Revenue Agency.
Many investors gradually transition toward ETFs as their priorities change, their time availability decreases or they decide they prefer a simpler long-term approach. However, with all investments, including ETFs, it’s a good idea to understand the tax treatments for any account you choose before investing in them.
