Exchange Traded Funds VS Stocks
Many investors stick with stocks because they believe there are better opportunities for gains with them. Sometimes, this is true. If you happen to catch the beginning of the next Microsoft wave, then you may outperform
virtually all ETF's. But for most of us, we aren’t that lucky. In fact, most people buy and hold some of the largest “Blue Chip” companies in America . This strategy has, in fact, led to some profits over the years. It has also led to
some major disasters. Some notable examples of companies that were market cap leaders in their time include Enron, Worldcom, Lucent, AT&T, Sun Microsystems, Ford, and General Motors. Investors that rode these on the
way down are very disappointed indeed. We have created some charts below to demonstrate the ETF advantage for investors.
In our first example, we have compared the returns from the past 5 years for Citigroup, JP Morgan, and the I-Shares Financial ETF (IYF). Although Citigroup and JP Morgan make up over 13% of the I-Shares fund, IYF has significantly outperformed both stocks. This is due to the risk being spread across other companies, such as Bank of America,
Wachovia, Wells Fargo, and many others.
In our next example, we take a peek at two of the largest drug companies in America , Merck and Pfizer. These two companies are widely held and regarded as “defensive” holdings. Together, they make up over 15% of the I-Shares Health Care ETF (IYH). As Merck and Pfizer have fallen on difficult times, the ETF reduces Vioxx and Viagra risk.
The past few years have been a boon for commodities. The growth in Asia has spurred a demand for metals and chemicals. Had a wise investor become aware of this trend early, they could have made money buying huge commodity companies such as Alcoa and DuPont, right? Wrong. Investors in these two commodity giants completely missed out on the profits. The Materials Select SPDR ETF (XLB), however, rewarded investors, even though Alcoa and DuPont make up almost 20% of the fund:
Of course, not all large companies are losers. Investors scored big on oil giants Exxon and Chevron as oil prices skyrocketed. Surely, these stock beat an energy ETF, didn’t they? Nope. The Energy Select SPDR (XLB) beat the two stocks that make up a whopping 24% of the fund by a wide margin:
Another way ETF investors take advantage of worldwide trends is to use ETF's to diversify into countries or regions that currently have a more compelling story. Canada and Australia are commodity rich countries with good balance
sheets. How have the ETF's rewarded the holders of the I-Shares Canada Index and the I-Shares Australia Index versus holding the S&P 500? Glad you asked:
The examples go on and on. SPDR Industrials (XLI) versus General Electric and Tyco:
I-Shares Consumer Non-cyclical versus Kimberly Clark and Coke:
Utilities SPDR (XLU) versus American Electric Power and Duke Energy:
I-Shares Consumer Services (IYC) versus WalMart and Time Warner:
And, finally, I-Shares Real Estate versus Equity Office Properties and Equity Residential:
The case for Exchange Traded Funds looks compelling. Indexing can be every bit as rewarding as investing in individual stocks. Sarasota Capital Strategies you can help reduce the time and stress needed to manage your individual portfolio with the use of exchange traded funds.
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