ETFs vs. stocks

ETF vs. stock: Which is right for you?

ETFs and stocks offer some of the same benefits and risks. Knowing the differences can help you choose between them.

Pros and cons of stocks

Many investors turn to stocks when they want to grow their savings over time. Stocks represent shares of ownership in businesses. When a company performs well, people who own company stock can benefit. For example, if a company grows quickly or earns high profits, they tend to attract new investors who want to buy their shares, and who bid up the price. Some businesses also decide to pay dividends to their stockholders.

Stocks have risks too. They are traded on exchanges every day, and their prices can experience a lot of ups and downs, sometimes for reasons not related to each company’s actual business performance. This risk makes stocks different from bank accounts or certificates of deposit (CDs). Bonds — another popular investment — also experience price changes and can lose value like stocks. But bonds usually see smaller price changes.

Over long time periods — years and decades — stocks typically have offered higher returns than other common investments, such as savings accounts, CDs, or bonds.

Pros and cons of ETFs

ETF stands for exchange-traded fund. An ETF is a portfolio that contains many stocks, not just one. (Some ETFs can also invest in bonds and other securities.) Because an ETF can be bought and sold on an exchange throughout the day, an ETF is more like a stock than a traditional mutual fund.

As a bundle, an ETF is diversified in ways that a stock is not.

ETFs consisting of stocks have many of the advantages and disadvantages of individual stocks, with one significant difference: In a diversified ETF, the ups and downs in its price tend to be more moderate. On most days, some stocks rise in price and some fall. If you own an ETF with many stocks, there is a good chance it will have some stocks gaining in price, which can offset price declines in other stocks. Diversified ETFs tend to have less price volatility day-to-day, and over time, than one stock.

Like stocks, of course, ETFs can lose value in the short term, and even for extended periods. Owning an ETF is not a one-way trip to riches.

It’s also important to note that the trading price of an ETF can sometimes be different than the fund’s net asset value — the total value of the securities it holds. ETFs can trade at discounts or premiums to their NAV. This is another way they are different from open-end mutual funds, which set their NAVs at the end of each trading day.

The difference between ETFs and stocks

When you invest in an ETF, you can gain exposure to a broad range of opportunities — companies in different sectors of the economy, such as consumer, industrials, financials, energy, health care, and technology. Alternatively, you can choose an ETF that focuses on one of these sectors. You also have a choice of ETFs with a specific style strategy, such as value or growth, or one that focuses on small companies.

When you invest in one stock, your fortunes are tied primarily to one company. Some of the investment performance depends on the quality of its management and employees, and how well they execute their business strategy. Another factor is the business context — how much competition a company faces, whether it operates in a growing, static, or declining industry — not to mention overall economic conditions. In rare cases, stocks can experience very sharp price drops, and companies can face bankruptcy. These can be very damaging to a portfolio that depends on a single stock at its core.

Given these differences, relying on a single stock can be a high-stakes endeavor. Investors can build a more diversified portfolio by buying several stocks one by one — or they can buy an ETF with built-in diversification.

When ETFs are better than stocks

Each person has specific personal, financial, and tax considerations to keep in mind when making an investment plan. But key differences between stocks and diversified ETFs offer some hints on when it might be better to own an ETF.

  • Building a diversified core. When used as a starting point for building a portfolio, a diversified ETF offers exposure to many opportunities and the potential for lower volatility than a single stock.
  • Managing expenses. Many ETFs offer low expense ratios, which may be attractive when compared to the potential costs of buying the number of stocks needed to match an ETF’s diversification benefits.
  • When stocks move together. ETFs can be more competitive during periods when stock prices generally move in sync with each other, or when the market’s leading stocks do not outperform by a wide margin.

Explore Putnam ETFs

Putnam offers an expanding variety of ETFs, which are called active ETFs because holdings are selected by professional portfolio managers who are skilled and experienced as investors. They aim to make each ETF outperform a market index, while working within a risk management framework intended to reduce downside volatility. The portfolio managers are backed by a large group of researchers who are constantly evaluating companies. All Putnam ETFs are diversified with many holdings.

Putnam offers active ETFs in a range of equity and fixed income investment strategies

 PBDC Putnam BDC Income ETF Companies offering attractive income to public investors through private market exposure
 SYNB Putnam BioRevolution ETF Companies that are leveraging innovation within biology
 PCRB Putnam ESG Core Bond ETF Income securities diversified across multiple sectors for all-weather performance
 PHYD Putnam ESG High Yield ETF Corporate bonds selected for higher income potential
 PULT Putnam ESG Ultra Short ETF Short duration securities selected for attractive income potential
 PEMX Putnam Emerging Markets ex-China ETF

Pursues alpha over a market cycle through fundamental research in emerging markets beyond China

  • Concentrated, best-ideas approachSeeks to capitalize on inefficiencies by targeting 30–60 high-conviction names
  • Focus on mispriced earningsSeeks to overweight high-quality names where we have a differentiated view on earnings
  • Active investment strategyRigorous fundamental approach seeks companies with a durable competitive advantage
 PGRO Putnam Focused Large Cap Growth ETF* Companies benefiting from durable growth themes
 PVAL Putnam Focused Large Cap Value ETF* Relative value opportunities selected with a multidimensional approach
 PPEM Putnam PanAgora ESG Emerging Markets Equity ETF Pursues outperformance in emerging market stocks that exhibit positive environmental, social, and governance (ESG) metrics
 PPIE Putnam PanAgora ESG International Equity ETF Pursues outperformance in developed market stocks that exhibit positive environmental, social, and governance (ESG) metrics
 PFUT Putnam Sustainable Future ETF* Companies creating solutions to essential sustainability challenges
 PLDR Putnam Sustainable Leaders ETF* Companies demonstrating leadership in material sustainability issues

* The following disclosure applies to Putnam Sustainable Leaders ETF, Putnam Sustainable Future ETF, Putnam Focused Large Cap Value ETF, and Putnam Focused Large Cap Growth ETF:

These ETFs are different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:

You may have to pay more money to trade the ETF's shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.

The price you pay to buy ETF shares on an exchange may not match the value of the ETF's portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared with other ETFs because it provides less information to traders.

These additional risks may be even greater in bad or uncertain market conditions.

The ETF will publish on its website each day a "Tracking Basket" designed to help trading in shares of the ETF. While the Tracking Basket includes some of the ETF's holdings, it is not the ETF's actual portfolio.

The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF's performance. If other traders are able to copy or predict the ETF's investment strategy, however, this may hurt the ETF's performance.

For additional information regarding the unique attributes and risks of the ETF, see the disclosure below and the Principal Investment Risks section of the prospectus.

Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV, and are not individually redeemed from the fund. Brokerage commissions will reduce returns.

The funds have limited public-trading history and will operate differently from other actively managed ETFs that publish their portfolio holdings on a daily basis.

Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.

Frequently asked questions  |  Active ETFs

Where can I buy ETFs?

You can purchase and sell ETFs, including Putnam ETFs, through most self-directed brokers or with the guidance of your advisor.

With an online, self-directed brokerage account, you can have access to a variety of investment products and the flexibility to manage a personal portfolio. Brokerage commissions and transaction costs may vary, so be sure to check on these costs with your broker, advisor, or financial representative.

If you already have an account, the key first step is to carefully learn about and compare ETF products by reading the prospectus and other product literature. You also must have money available in your account to trade. Most online brokerages have tools that help you search and browse for the ETF that you wish to buy. If you have specific ETFs in mind, searching for the fund name or ticker symbol is often the easiest way to find them.

What are active ETFs?

Active ETFs are actively managed portfolios that have managers who select securities rather than seeking to replicate a market index. Active managers typically have a research-driven investment process and seek to outperform benchmark indexes. This makes them different from traditional passive ETFs. Active ETFs try to capture more of the upside in financial market performance and less of the downside than a passive ETF. Active portfolio managers research companies, industry sectors, and markets to choose securities they believe can outperform indexes like the S&P 500 Index or the Russell 2000 Index.

Like all ETFs, active ETFs offer diversification, intraday trading, and cost and tax advantages, while they also offer these benefits:

  • Potential for outperformance: Active strategies pursue above-benchmark returns through investment research and portfolio positioning.
  • Active risk management: Proactive research helps to identify better risk/reward potential and seeks to reduce unintended risk.
  • Professional oversight: Experienced portfolio managers help active ETFs balance risk and return while delivering the ETF’s structural benefits.

How are ETFs traded?

An ETF trades on the stock exchange, just like a stock. As market prices change throughout the day, so does the price of the ETF. This means investors have a choice about when to trade shares, which is not the case with a mutual fund, which sets its price only once per day at the end of trading.

ETF prices are visible to investors at all times throughout the trading day. With a mutual fund, if you put in a buy or a sell order before 4:00 p.m., the actual trading price is not yet known. You only learn the price after the market closes at 4:00 p.m. and the fund calculates its daily NAV.

When investors place an order to buy an ETF, the sponsor that issues the ETF assembles a bundle of securities. In the case of certain types of ETFs, called semi-transparent ETFs, the sponsor assembles a bundle that represents the underlying securities. As with buying a stock, there is no tax involved in the purchase.

How are ETFs regulated?

The SEC regulates ETFs under the Investment Company Act of 1940. According to the Investment Company Institute (ICI), a trade association that represents regulated funds, ETFs generally fall under the same regulatory requirements as mutual funds and unit investment trusts (UITs).

For more information, the ICI offers a 20-page overview of the regulation of ETFs, Understanding the Regulation of Exchange-Traded Funds Under the Securities Exchange Act of 1934.

How do I choose an ETF?

Choosing an ETF or building a portfolio of ETFs is not very different from building a portfolio of other types of investments. Remember to research your choices carefully, think about your goals, and learn about risk considerations.

  • Think about your investment objective. As with any investment, it’s important to think carefully about your goal. Are you investing for growth or for income? What is your time frame — how long do you want your money to be invested in the market? If possible, talk with a financial advisor for input on setting appropriate goals, and write your objective down for future reference.
  • Think about your risk tolerance. Even before you begin to compare possible investments, it’s a good idea to think about how much risk you can live with and still sleep at night. An ETF’s value can change every day, and for unexpected reasons. The stock market can experience corrections with 10% drops and bear markets with 20% declines. It’s important to be able to weather any storms like this and be patient for prices to recover, because selling when the market is down can be a setback for your long-term financial goals.
  • Understand investment risks. As you research ETFs, read their prospectuses and risk disclosures so you know the types of risks that can be involved in owning the investment. Try to understand whether these are risks you can accept and make sense given your objective. It can be helpful to meet with a financial advisor to discuss questions.
  • Remember the benefits of diversification. If you own only one stock and something goes wrong with the company, it can be a severe setback to your financial plan. In rare cases, companies also file for bankruptcy, or, in more extreme cases, face liquidation. It’s a classic strategy to try to offset this risk through diversification — owning many securities — as an ETF does. You can also compare ETFs to see how diversified they are. Some are diversified within a sector, while others are diversified across sectors. Some are even diversified across national markets. Try to look at product information to understand an ETF’s sector composition and total holdings.

Which ETF is right for me?

ETFs come in a wide variety. There is probably one for every need, so it’s important to focus on what fits you best. All investment decisions are highly personal. Key questions to consider are:

  • Your financial goals, age, and when you expect to retire
  • Your current income and wealth as well as your tax situation
  • Health and family financial needs

When you explore ETFs, make some standard comparisons to try to narrow down the funds that might be right for you:

  • Active vs. passive strategies: An active manager tries to outperform a passive benchmark index, while a passive strategy tries to match the benchmark, but with lower expenses.
  • U.S. vs. global: Do you want to invest only in the United States, or do you want opportunities around the world?
  • Growth or value: Growth-style ETFs invest in growing companies. Value-style ETFs favor stocks selling at more attractive prices, or that generate dividends for income.
  • Large or small companies: Large companies make up the core of many portfolios, but small companies can at times grow more quickly.
  • Stocks or fixed income: Stock ETFs may be a better choice for capital appreciation, while fixed income ETFs can be a source of current income.