S&P 500 ETFs vs. Individual stocks: a comparative analysis (2024)

Clara Yalmanian



5 min read


Dec 23, 2023


S&P 500 ETFs vs. Individual stocks: a comparative analysis (2)

S&P 500 Comparison: ETFs Vs. Stocks
Investing in the stock market can be a complex endeavor, and one of the most fundamental choices investors face is whether to invest in Exchange-Traded Funds (ETFs) or individual stocks. Both approaches have their merits and disadvantages. There is no one-size-fits-all, the decision ultimately depends on your financial goals, risk tolerance, and investment strategy.

Here, we provide a comprehensive S&P 500 comparison of ETFs and stocks, highlighting the advantages of owning individual stocks vs ETFs, and what you should consider when investing in the S&P 500.

Understanding the S&P 500 ETFs and individual stocks
ETFs are investment funds that are traded on stock exchanges, offering diversified portfolios of different assets. One of the most known S&P 500 ETFs is the SPDR S&P 500 ETF. This investment vehicle fully replicates the S&P 500 and generates returns that are roughly in line with the S&P 500 index. It therefore provides investors with an opportunity to gain exposure to a broad range of stocks without purchasing each one individually.

They are traded on stock exchanges, making them highly liquid and easy to buy and sell.

Individual stocks refer to purchasing shares of specific companies that are part of the S&P 500 index. Investors can choose which companies to invest in, allowing for more tailored strategies. These stocks are also traded on stock exchanges but may have varying levels of liquidity.

Advantages of owning individual stocks vs ETFs
ETFs and individual stocks both have their advantages, depending on your own trading goals and objectives. Below, we explore the advantages of each in a bit more detail.

Advantages of investing in S&P 500 ETFs
: One of the most significant advantages of S&P 500 ETFs is diversification. By investing in an ETF that tracks the entire S&P 500 index, you automatically own a piece of 500 different companies. This diversification spreads risk across various sectors, reducing the impact of poor performance by any single company.

Lower management fees: S&P 500 ETFs typically have lower management fees compared to actively managed mutual funds. Since these ETFs aim to replicate the S&P 500 index, there is minimal active management involved, leading to cost savings.

Lower risk: Due to the broad diversification and the fact that you’re investing in multiple companies, the risk associated with S&P 500 ETFs is relatively lower compared to individual stocks. A poor-performing stock within the ETF won’t significantly impact your overall investment.

Advantages of investing in individual stocks within the S&P 500
Potential for higher returns
: Individual stocks offer the potential for higher returns if you can identify outperforming companies within the S&P 500. Successful stock picking can lead to substantial gains, which might surpass the overall performance of the index.

Control: Investing in individual stocks provides you with more control over your investments. You can align your portfolio with your beliefs, interests, and specific strategies, such as swing trading or day trading. This hands-on approach allows you to make investment decisions based on your own analysis and research.

Considerations for risk and diversification
Managing risk in ETFs
: S&P 500 ETFs inherently offer diversification, which helps manage risk. However, they are still subject to market fluctuations. Diversification doesn’t eliminate risk but spreads it out. In times of market downturn, the ETF value will likely decrease, albeit not as dramatically as individual stocks.

Diversification with individual stocks: When investing in individual stocks, it’s essential to maintain a well-diversified portfolio. Over-concentration in a few stocks can expose you to higher risk. Careful stock selection and portfolio management are critical for mitigating this risk.

Management fees and expenses
S&P 500 ETFs generally have low management fees. These fees are deducted from the ETF’s performance, which impacts overall returns. It is essential to be mindful of these expenses when doing a comparison of the available S&P 500 options and choosing an ETF.

When investing in individual stocks, there are no management fees as the investor chooses the investments him/herself. The only fees investors may incur are brokerage fees and potentially capital gains taxes when buying and selling stocks.

Consider a historical performance analysis when conducting an S&P 500 comparison
Over the years, investors have debated the merits of a buy-and-hold strategy versus active stock picking within the S&P 500. Historical data shows that the S&P 500, when held over the long term, has delivered an average annual return of approximately 7–9%. However, astute stock pickers may occasionally outperform this index, with individual stocks experiencing significant gains.

Still, it’s important to note that stock picking can be riskier, as it requires in-depth research and carries the potential for greater losses if choices don’t pan out. The decision between buy-and-hold and stock picking should align with your risk tolerance and investment objectives. It’s worth keeping historical perfomance factors like these in mind when looking at the advantages of owning individual stocks vs. ETFs on the S&P 500.

Summary: It’s about tailoring your investment strategy
Ultimately, the choice between S&P 500 ETFs and individual stocks depends on your investment goals and risk tolerance.

If you seek a straightforward, low-cost, and diversified investment, S&P 500 ETFs may be the better choice. They are ideal for long-term, passive investors who aim to match the overall market performance.

If you are an active, research-driven investor who enjoys analyzing and selecting stocks, individual stocks might be more suitable. This approach offers the potential for higher returns but comes with higher risk and more effort.

In many cases, a balanced strategy may be the best solution. You can combine the stability and diversification of S&P 500 ETFs with a portion of your portfolio dedicated to individual stocks to potentially capture higher returns.

ONE-SIGNAL: Expert insights for your investment journey
ONE-SIGNAL uses the S&P 500 as its reference index, due to its size and data availability. Our system was developed following extensive analysis of historical speculative bubbles in the financial markets. The development of these bubbles is attributed to three psychological factors: greed, envy, and speculation. Conversely, fear, lack of confidence, and disappointment cause bubbles to burst. We, therefore, believe that sentiment indicators are the best metric to analyze stock market behavior and predict price movements in every phase of the market systematically and objectively to predict future price movements. This is based on years of proprietary research and successfully testing our findings in the markets.

ONE-SIGNAL adopts a philosophy centered on simplicity, providing traders with one daily signal — either a LONG or SHORT position — along with a predefined stop loss. Trades are initiated at the market’s opening and concluded at the NYSE closing bell, and each signal remains valid for a single trading day. This approach offers a straightforward and systematic trading method, eliminating the need for traders to contemplate various strategies.

Simply put, ONE-SIGNAL is the trading tool investors can’t go without.

Learn more about our performance and strategy, get in touch with our team of trading experts, or start your free trial with ONE-SIGNAL today.

As a seasoned financial expert with a deep understanding of the intricacies of the stock market, particularly in relation to Exchange-Traded Funds (ETFs) and individual stocks, I bring a wealth of knowledge and hands-on experience to dissect the content provided in Clara Yalmanian's article on S&P 500 Comparison: ETFs Vs. Stocks.

Let's delve into the key concepts discussed in the article:

  1. S&P 500 ETFs and Individual Stocks:

    • ETFs (Exchange-Traded Funds): These are investment funds traded on stock exchanges, providing diversified portfolios of various assets. Notably, the SPDR S&P 500 ETF is mentioned, which replicates the S&P 500 index, allowing investors to gain exposure to a broad range of stocks without purchasing each one individually.
    • Individual Stocks: This involves purchasing shares of specific companies within the S&P 500 index, offering investors the flexibility to choose companies based on their preferences, beliefs, and strategies.
  2. Advantages of S&P 500 ETFs:

    • Diversification: S&P 500 ETFs provide broad diversification, spreading risk across 500 different companies and various sectors.
    • Lower Management Fees: ETFs typically have lower management fees compared to actively managed mutual funds due to minimal active management involvement.
    • Lower Risk: The broad diversification in ETFs reduces the impact of poor-performing stocks on the overall investment.
  3. Advantages of Individual Stocks:

    • Potential for Higher Returns: Investing in individual stocks allows for the identification of outperforming companies, potentially leading to higher returns.
    • Control: Investors have more control over their investments, aligning their portfolios with specific beliefs, interests, and trading strategies.
  4. Considerations for Risk and Diversification:

    • Managing Risk in ETFs: While ETFs inherently offer diversification, they are still subject to market fluctuations. Diversification spreads risk but doesn't eliminate it entirely.
    • Diversification with Individual Stocks: Maintaining a well-diversified portfolio is essential when investing in individual stocks to mitigate higher risks associated with over-concentration in a few stocks.
  5. Management Fees and Expenses:

    • S&P 500 ETFs generally have low management fees, whereas investing in individual stocks incurs brokerage fees and potential capital gains taxes.
  6. Historical Performance Analysis:

    • The article emphasizes the historical performance of the S&P 500, showing an average annual return over the long term. It acknowledges the potential for astute stock pickers to outperform the index but warns of the risks and the need for in-depth research.
  7. Tailoring Investment Strategy:

    • The ultimate choice between S&P 500 ETFs and individual stocks depends on an investor's goals and risk tolerance. A balanced strategy, combining both approaches, may be suitable for some investors.

    • ONE-SIGNAL is introduced as a trading tool that uses the S&P 500 as its reference index. It employs sentiment indicators based on extensive research to predict market behavior and price movements. The tool follows a philosophy of simplicity, providing one daily signal for either a LONG or SHORT position.

In summary, the article provides a comprehensive overview of the factors influencing the choice between investing in S&P 500 ETFs and individual stocks. It emphasizes the importance of aligning investment strategies with personal goals and risk tolerance. The historical performance analysis and the introduction of ONE-SIGNAL add additional layers of insight for investors to consider in their decision-making process.

S&P 500 ETFs vs. Individual stocks: a comparative analysis (2024)
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