Commentary: Funds vs Stocks

Updated: Mar 30


Funds Vs Stocks - What Should You Be Using?

Bill talks through some of the pros and cons of usings individual securities, like stocks, versus funds.



Stocks or Funds?


In this post Bill digs into the pros and cons of using mutual funds and ETFs, versus building a portfolio of individual securities. There are a number of considerations from fees to taxes, so you'll want to evaluate how your portfolio is invested.

Transcript:

0:06

I'm Bill Woodruff. I'm the founder Chief Investment Officer of WealthFactor. Today I'm going to share some thoughts about stocks or individual securities and their benefits and disadvantages versus funds like mutual funds or ETF.


0:21

Let's just go through some of the examples I have up here for the pros and cons associated with funds. Diversification is absolutely a pro and very positive thing from a fund perspective.


0:36

Low transaction cost through scale. Absolutely true. If you looked at some of the largest ETFs and the annual dollars they spend on trading costs, it's incredible how low they are.


0:48

Improved execution costs through scale. I'm going to caveat this. In general, this is true with scale. You have the ability to trade and of execution, the challenge that you see though and the counterpoint to this is scale becomes a challenge for smaller securities, and this is one I think often overlooked area in financial markets for smaller companies, and the reason why you see the prevalence in passive investing, for market cap weighting. If you look at Vanguard with $5.6 trillion in assets, they really can't do anything other than market cap weighting.


1:26

Easy access to foreign markets, this is true and remains mostly true. On a relative basis, it's far easier to access foreign markets directly with individual securities than it's ever been. However, there's all sorts of additional considerations; exchange and currency, that perhaps make it not worth it relative to especially some of the lower cost ETFs, when building, foreign markets exposure.


1:55

Access to investing in smaller amounts and this is still true, but I'm going to put a line through this because the definition for smaller amounts is rapidly approaching a much more palatable number across lots of investor types. And I would put building a 300 to 500 security portfolio of individual stocks, feasible and rational, from an expense and time and energy perspective down to as little as three to $500,000 portfolio size were 10 years ago it was probably $10,000,000, and 20 years ago was probably $50,000,000. And so again, technological innovation is quickly changing these things.


2:37

Accountability and fairness to investors. This is something that is and continues to be something that's a strength of funds, right? If you have a single fund, every investor gets the exact same experience.


2:49

What are some of the disadvantages to funds?


2:51

An added layer of fees and expenses.


2:54

There's no potential for customization, execution control. Maybe there's some differences in types of funds right, whereas a mutual fund you execute at the end of day based on end of day pricing for all the securities within that fund. An ETF, an exchange traded fund clearly has more execution control then that.


3:14

Then tax inefficiency. In many cases, your taxes are influenced by rules and regulations associated with required distributions, or other investors decisions, or manager decisions to buy or sell securities on your behalf, which may or may not be in your best interest as an investor.


3:37

Let's look at individual securities or stocks, we'll dive right in to the pros.


3:43

Tax efficiency is probably the biggest one. If you have one fund that has 500 securities, you have one tax decision. You either sell it or you don't sell it. If you have 500 individual securities, you now have 500 individual tax decisions and based on maybe some deviation in your tax situation each year, or simply just an intentional tax loss harvesting strategy annually to maximize the reduction, maximize the amount of capital gains or potentially increase capital losses for the purposes of reducing tax liability. Each investor, should you use individual securities, now has more control of the tax outcomes.


4:29

Portfolio customization, certainly true However, many of the benefits that you, are many of the things that diversification and those sorts of things are really index based. The customization is limited.


4:47

Consistent with my risk smart approach to investing. It's a pure avoidance of picking timing, and then effectively layers.


4:58

Execution controls, obviously very, very high.


5:01

More accessible thanks to low trading costs. And I referenced this already, with commissions as low as they become down to maybe as little as $300,000 in terms of the size of portfolio were building, and using individual securities starts to make sense.


5:17

Full transparency. If you own a fund, you have a layer between you and what you and you own. Whereas if you own the securities in your name directly, you may not necessarily want all this information, but it's there. Those are your securities. And that extra layer from both the transparency and all other aspects, isn't there.


5:39

Same thing with the efficient, while many ETFs especially, are approaching and in some cases, the most broad and simple. Index based ETFs have actually become free from a fee perspective. There's no potential layer of fee from a fund.


5:58

Some of the cons associated with uh, with building portfolios of individual securities.


6:04

Access to investing in smaller amounts, as well as access to foreign markets. These two are somewhat linked in that, you know, kind of continued to say, access in smaller amounts. We're seeing that the removal of that over time, thanks to technology and lower trading costs.


6:20

That remains true with foreign markets, where it really doesn't, it's hard to justify using individual securities because of the additional complexities when using foreign markets. And so, investors should continue to focus on aspects in their portfolio that can drive efficiencies, minimizing fees, creating simple portfolio structures that are efficient, and then to increase tax efficiency.


6:51

Hope you found these comments useful. Stay tuned for further insights. Thanks




About WealthFactor: A Lake Oswego based investment adviser and wealth manager serving local high net worth and ultra-high net worth investors. Founded on the idea that high fees force unnecessary risks when providing investment advice. By leveraging the investment methodologies of the largest passive and rules-based asset managers, WealthFactor seeks to pass on the benefits that efficiency provides through financial technology on to its clients. WealthFactor offers custom investment advice services conveniently through separately managed accounts in each investor’s name. For more information visit www.wealth-factor.com.

About Bill Woodruff: WealthFactor’s founder has been investing in publicly traded financial markets for over 20 years. His career includes founding an alternative investment manager, launching and managing a mutual fund and serving as a managing director of a publicly traded investment manager. With over a decade of experience serving high net worth investors Bill skillsets uniquely blend an understanding of investor needs with an extensive financial markets and investing background.



Disclosures

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