Buy ETFs, Not Stocks

Is there really a need to buy stocks anymore?

I thought about this question as I sat here watching my basket of stocks bounce up and down in the markets. In my portfolio and watchlist of stocks is the usual companies. I have some large caps, mid caps and small caps. And recently, I added some really crazy ETFs that are leveraged up the wazoo.

Some of my stocks didn't blink an eye while S&P futures gapped up and moved strong for the day. I looked at the ETFs and noticed they were up very nicely. What the heck? Why did my money not grow today better than the sector ETF and the overall market?

Across my portfolio of stocks today was a disappointing sight. AMD down $0.03. Semiconductor Holders ETF (SMH) up $0.50. AIG down $0.01. Financial Sector Spyder (XLF) up $0.86. Two of my individual sector mutual funds have been lagging the markets movement up.

"Whats the point of investing in sector mutual funds if the ETFs are outperforming the stock mutual fund? These mutual fund managers are idiots!" I muttered to myself. I don't know about you, but I want my money to work for me on strong days when the market goes up, not lag.

Exchange Traded Funds Advantages

After seeing this disconnection between my individual stocks and mutual funds against comparable ETFs, thats when I decided to sit down and think about what are the advantages of Exchange Traded Funds.

Here is the list I drew up convincing me that its better to invest in ETFs than in mutual funds and individual stocks in general.

1) Risk Factor
If bad news hits on an individual stock sending your stock down 30% or more, you suffer. If bad news hits on an individual stock in a sector, your ETF won't go down 30% or more.

2) Cheaper To Trade
There are a lot of sector mutual funds out there that charge steep fees for the right to own shares in the fund. Many of these funds simply mirror the sector indexes. If you have $100,000 invested in one of these funds, it could cost you over $1,200 a year on fees when you enter in or out a position. Why bother with that silliness when you can just own an ETF and trade in and out for $10 a side. Yes, $20 total.

3) More Control Over Position
Sector mutual funds have restrictions on how many times you can execute a trade a year. They do this to cut down on redemptions and having to liquidate their position to raise cash to accomodate your trade. In volatile ETFs, you don't want to be restricted. You want full control.

4) Increased Leverage
There are many different products out there that allow the investor the freedom in the amount of risk one wants to take. For example, in the ProShares shorts, one can take a 200% inverse move in the Dow via the UltraShort Dow 30 ETF. If you think the Financial sector is going to soar up, then you can invest in the Ultra Financials ProShares.

5) Lower Taxes
If you trade your ETF out of a regular brokerage account infrequently, you will incur lower taxes than a mutual fund. This is because a mutual fund is constantly trading in and out of its positions incurring gains and losses for each company they hold. That results in capital gains to you.

As you can see, there's no need to invest in mutual funds or individual stocks anymore. Reduce your risk, your costs and have more control over your investments by investing in ETFs.