Why I don’t invest in ETFs
As this is more of a personal blog compared to the one I’m contributing at blog.deveo.com, I’m covering a wider range of topics and thoughts here, not just the daily software development related stuff that happens at Deveo. This blog post is a collection of thoughts regarding my investment strategy in the stock market, and why I don’t trade ETFs.
My investment history has been quite cyclic, and with cyclic, I mean that during the last 5 years or so I accumulated a small portfolio of public stocks or ETFs but have had to sell them partially or all due to different life situations. Regardless of the cyclic nature of my investment history, I believe this time I don’t have to sell everything and start all over again.
I used to invest in ETFs, mainly due to the automatic distribution available, but for the past one year or so, I have been doing the direct stock picking. There’s a constant debate whether someone can “beat the index” and so on, but as a natural control-freak, I have decided to go that road. Below are some points why I’m no longer investing in ETFs but instead, pick the stocks manually.
I get to choose the time to buy
When you invest to an ETF you are investing to the point in time for the whole tracking index. As a simple example, there’s an ETF tracking the OMXH25 index. The ETF invests in the 25 biggest companies in the Helsinki stock market. At a given day, month or even year, certain stock prices are up, certain stock prices are down. I would nearly never buy all 25 stocks of a given index during the same day. It doesn’t matter whether the ETF tracks an industry or a specific stock market.
Even if my portfolio would consist of the exactly same stocks that are in the given index, I find it beneficial to have the opportunity to pick when I want to buy the given stock. Some wise guy used to say “Buy when it’s cheap, sell when it’s expensive”. I follow the first part only, as I mostly try to follow a buy-and-hold strategy.
I get to pick the stocks that relate to my strategy
At the moment, I consider my investment strategy to be closer to value investing than growth investing. This means investing in stocks that yield dividends rather than grow fast. As an example, Tesla is a growth stock, whereas Johnson & Johnson is a value stock. I follow both the US and European dividend aristocrats and try to find good buying opportunities from both.
One of my buying criteria for a stock is the expected dividend yield. If I were to invest in ETFs, I might not have the ability to pick whether certain stock matches the criteria I have set. One could argue that there are ETFs that yield dividends, and that’s true, but even then the fluctuation of the dividend yield and the aforementioned timing to buy are aspects that I care greatly.
I get a new hobby and a chance to accumulate my knowledge
For me, investing is a more of a hobby rather than something I do for work. Investing inETFs would mean quite dull and passive strategy that requires little to no need to investigate and analyze the stock market and its individual stocks. As an analytical person with interest in the details and even nitpicking from time to time, I enjoy reading analyses made by others and even more fine-grained details found from the financial statements and fiscal reports. Picking individual stocks I have the possibility to dig in and investigate the opportunities, which is exciting.
I don’t pay other costs than the purchasing costs
I left the cost part last, as for me, it’s the least important, but still worth mentioning. Even if ETFs are passive by nature they have maintenance cost involved. The maintenance costs of ETFs range between 0.1% to 2% and depend on the market or type of ETF in question.
As an example, ETF that yields 5% in a year, you would only accumulate 4,685% yield if the maintenance cost would be 0.3%. 10 000€ invested for 10 years would yield around 500€ more without the costs involved. If you were to invest directly in the stocks, the total yield would be 3% greater during that 10 years timeframe.
Conclusion
I have found that defining an investment strategy and following it is not just about answering a single question. My investment strategy is picking value stocks and hold the stocks a long time. My investment horizon is approximately 9 years, which is relatively short time compared to many, but it’s still a horizon. I hope this post shed some light to in the investment area and comparison between ETFs and manual stock picking.
Do let me know in comments why you would or would not invest in ETFs or do manual stock picking.
