Exchange Traded Funds vs Investing Directly


By Dale Gillham |


Over the past 12 months, there has been an influx of investors gaining exposure to the Australian stock market by investing in Exchange Traded Funds (ETFs), as these investments are heavily promoted as a low-cost way of achieving similar returns to an index, such as the S&P/ASX 200. 

But when I ask investors if they want to outperform the stock market rather than achieve the equivalent to an index, they always state they want better returns. So how do you outperform the stock market in a low-cost effective way? The answer is to invest directly in stocks.

How to achieve a 20% return each year

Unfortunately, there is a misconception that to achieve better returns than an index, you need to hold all of the stocks in the Index, but this is simply not true. Approximately, 50 per cent of the market capitalisation in an index comes from the top 20 stocks and it is these stocks that have the greatest influence on the return the index achieves.

In my latest award winning book, Accelerate Your Wealth, I traded these same top 20 stocks to outperform the market, achieving an average annual return of 22.58% per annum over 10 years by actively managing 8 to 12 stocks using some simple but powerful trading strategies. What this shows is that with some simple knowledge anyone can achieve better returns than an index fund or ETF.

Owning a small number of stocks will ensure your fees are low, as you are only pay brokerage on the stocks you buy or sell, just as you would when owning an ETF. But the upside is that you pay no ongoing fees for holding these stocks directly, as you would when owning an ETF, which makes investing directly in stocks far more attractive.

Remember, anyone armed with a small amount of knowledge can invest directly in a portfolio of top stocks and achieve returns that are superior to that of an index fund or ETF. That said, regardless of how you choose to invest, it is important that you understand what you are investing in.

What were the best and worst performing sectors last week?

Utilities was the best performer up 0.56 per cent followed by Industrials and Financials, which were both up around 0.30 per cent. The worst performing sectors included Consumer Staples down 3.44 per cent followed by Information Technology down 2.26 per cent and Consumer Discretionary down 1.52 per cent.

The best performers in the ASX/S&P top 100 stocks included Cleanaway Waste Management up 9.62 per cent followed by Ansell up 8.25 per cent and the Star Entertainment Group up 5.29 per cent. The worst performing stocks included Beach Energy down 23.65 per cent followed by JB Hi-Fi down 7.70 per cent and Northern Star Resources down 7.64 per cent.

What's next for the Australian share market?

The Australian stock market closed slightly lower last week in what is technically considered an inside week, as it did not trade higher or lower than the preceding week. Previously, I indicated that the market would likely pullback for one or two weeks and given what occurred last week, it is still possible that the market could trade lower this week.

That said, how the market unfolds this week will confirm whether the market will fall further. A rise above 7,538 points indicates the market will rise over the coming month while a fall below 7,290 points indicates it will fall over the next few weeks.

Overall, I still expect the All Ordinaries Index to be mostly bullish throughout 2021, with the market expected to rise to around 7,600 points or higher.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.


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