Ken Fisher on Stocks vs. Mutual Funds and ETFs

Pretty often I meet people who ask me, "When should I use mutual funds or ETFs, commingled product, to be a substitute, or replacement for, or instead of buying individual stocks?" That's a great question. It's a very basic question. And the answer to that, said simply, is it comes down to your circumstances. If you have enough money, I'll come back and talk about that in a moment, it is almost uniformly better for you to own principal underlying stocks. Why? Because they're cheaper. They're more tax efficient. You pay one low commission—and commissions, as you know today, are very low and less than ongoing ETF fees and much lower than mutual fund fees. 

Mutual funds, of course, are not tax efficient. ETFs are, but they're broad spectrum. Some are very specialized, but the more specialized ones are more expensive. The fact is, said simply, that if you have enough money, you're better off creating whatever it is that you would have as a portfolio via ETFs or mutual funds by just owning the same underlying securities. If you would be passive, buy the stocks and be passive. If you would have an active fund, buy the stocks and be active. 

One reason for a mutual fund is because you believe that somebody is a really good money manager managing that mutual fund and they'll do better than you would do. Might be true, but most of the time probably isn't. Are there people that do that? Yes. Is it a high percentage of the mutual funds? It's a small percentage of the mutual funds. Almost always. Maybe always. Then, additionally, you've got the reality that the underlying stocks themselves are very tax efficient. You do a one-time fee that's low compared to the other charges that the others have, and you're well ahead. 

If, however, you have very small amounts of money, you can't do that because the costs of the stock still remain low, but if you have very small amount of money, you can't diversify. And there's a huge benefit to diversification. So, you can get that diversification through the ETF or the mutual fund. Other things being equal, usually I would prefer the ETF over the mutual fund because it tends to be more tax efficient. Costs tend to be lower, although not necessarily lower. But as you're looking at either of these forms of commingled product, you need to focus very heavily on trying to keep your costs as low as possible. Which when you're buying principal underlying securities, the stocks themselves, is a much lesser concern that one-time commission over a longer time period that you hold the stock lets you amortize that low commission and have you be a much lower total cost than with the commingled products.