We conclude our educational series with this chapter ‘If you should invest in ETFs or direct equities.”
So far you’ve understood the history of ETFs, how three stock market crashes shaped the world of investing, and top ETFs based on 1 year performance in the country. In this chapter, you will know which investment vehicle you should pick based on your risk taking ability and financial goals.
A quick recap
ETFs are hybrid models of Mutual Funds and Stocks. Like Mutual Funds, ETFs invest in various businesses from a particular sector, mimic an index, or invest in different assets.
But the difference is like Stocks, ETFs actively trade on the exchanges. Traders can buy and sell ETFs through their trading accounts. These ETFs have pricing and liquidity throughout the day.
Though ETFs provide features of MFs and stocks, it’s not easy to pick one over the other. Making this choice is similar to making any other investment decision because you are again divided on the risk or return.
Reducing volatility of an investment is a common method of mitigating risk. But how do you keep a check on the volatility of a stock or an ETF? The answer is simple -Beta.
The Beta factor
Every investor, whether retail, institutional, or a HNI investor, wants to get an Alpha in the stock market.
Keep in mind, you can’t achieve alpha without considering the role of Beta when investing. Though these two Greek letters are used in math extensively, they have an important place in the investing too.
Alpha is used to describe an investment strategy’s ability to beat the market. It is also called an abnormal rate of returns and often juxtaposed with Beta.
Beta measures the volatility or calculated risk of a security to understand how much a stock is expected to go up or down on a daily basis against the broader market.
A security with a beta of 1.0 moves in line with the broader market. Meaning, if the stock market moves up or down 1% the security will also rise or fall 1% on any given day.
The lower the beta value, the less sensitive is the underlying instrument compared to the broader market. For instance, Security A with the beta value of 0.5 will rise only 0.5% when the stock market goes up 1%.
There is a general belief that one must invest in stocks instead of ETFs. We promote this belief. You will come to know why as you read further. Moreover, many investors believe that ETFs’ generate average or below average returns. We think that’s also true. The graph below shows performance of 10 ETFs in the country.
Unlike Motilal Oswal Nasdaq 100 ETF (MONASETF), which compounded at 36.67%, most ETFs delivered returns similar to Nifty. However, you cannot compare MONASETF returns with that of Nifty as the fund does not invest in Indian companies.
5 out of 9 domestic funds beat Nifty by ~1% with respect to annual compounded returns for the last 3 years. Whereas 4 domestic ETFs delivered subdued returns than the index. This proves that most ETFs’ follow the index when it comes to returns.
Why do we invest directly in stocks instead of ETFs?
Equentis Wealth Advisory Services, the parent company of Research & Ranking has been in the industry for the last 10 years. Since establishment our motto has been to help investors create wealth from investment in equities. Research & Ranking, launched in 2016, has consistently delivered market beating returns.
We use a simple but effective stock picking method that has resulted in multi-bagger picks for investors. We study a company’s fundamentals like financial stability, economic moats, the promoters’ vision for the company, future growth prospects of the industry, and more.
Our model portfolio has delivered spectacular 802% absolute returns, which is ~35% CAGR since inception, beating NIFTY at 159% returns by a handsome margin. Click here to view our performance.
Our recommendations are based on the investor’s risk profile and personalized to their financial goals. We believe investing for the long-term is the best way to create wealth.
We trust now you know why we invest in equities. Join our ever-growing wealth creator family of 25,000+ investors today.
Need sound advice on where to invest, how much to invest, for how long to invest in the stock market? Subscribe to 5 in 5 Wealth Creation Strategy and get a portfolio of 20-25 fundamentally strong stocks tailored for your goals and risk-taking ability.
*Disclaimer: Information mentioned in this email is for educational purposes. Please do not consider it a recommendation to buy/sell/hold from Research & Ranking.
Exchange Traded Funds – What Are They?