What are some of the advantages and disadvantages of investingin Exchange Traded Funds (ETFs) versus...

What are some of the advantages and disadvantages of investing in Exchange Traded Funds (ETFs) versus investing in individual stocks? Would you prefer to invest in ETFs or individual companies and why?

Expert Solution

Advantages of ETF

1. It provides diversification by reducing the unsystematic risk of individual companies.

2. It has a limited capital gain tax.

3. Immediately Reinvestment of dividend.

Advantage of Stocks:

1. It has the potential to provide higher returns.

2. Freedom of selection: Investor can actively select the company in which he wishes to invest.

Disadvantage of ETF:

1. ETF's can be highly concentrated to only large-cap stocks.

2. It has a lower dividend yield when compared to owning an individual stock.

Disadvantages of stocks:

1. It has high unsystematic risk or company-specific risk. (No diversification benefit).

2. It requires a lot of time to actively manage the portfolio.

jeff jeffy answered 2 years ago

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