ETFs vs. Stocks: Analysing Risk, Return, and Liquidity in Investment Decision-Making

ETFs and stock investments

Every investor has its preferences, but it’s hard to choose what goes into the basket. There are over 4k stocks in the American market divided across many sectors. It’s almost impossible for the ordinary investor to efficiently analyze each of them. After all, the ordinary investor has a life to be lived.

The figure below shows the market analyst’s sentiments about various sectors right now. Utilities and Technology are the “Strongest buy”, but if we add “Moderate Buy”, then Services and Technology are leading.


A great instrument to follow a specific market or thesis is an ETF (Exchange-Traded Fund). This product represents a basket of assets that usually track an index. Since nothing is free, the ETF manager will charge you to manage these assets, but the fees tend to be very low and almost insignificant. Much lower than buying stocks yourself.

Unlike mutual funds, you can purchase ETFs the same way as stocks and, of course, the prices fluctuate just like stocks. The problem is that an ETF price can go down when the assets it represents can go up. Right? Yes, but not for a long time. This instrument has mechanisms called creation and redemption. If the ETF price is over/undervalued in relation to its assets, an Authorized Participant (AP) will take this arbitrage opportunity to buy/sell shares of this ETF until its price converges to NAV (net asset value). This process assures that the ETF will always represent the value of its underlying portfolio.

The Top-5 ETFs

The Top-5 ETFs by AUM (Assets Under Management)

If you want to spice your portfolio, you can aim for leveraged ETFs. Just a few examples:

few examples

Just in case you don’t remember, an annualized return for 5Y means that your initial capital would have been compounded for this return each year. However, when calculating gains from your investments, take into consideration inflation as well.

Final thoughts

Stock investments are one of the best options for passive income, and if you are lucky enough, early retirement. There are numerous options out there and ETFs sound like a reasonable one. You could try and do it all alone, however you need to spend a lot of time educating yourself about this space.