Invest in ETFs, Stocks or Both? That is the Question: XLE, XLK, XLV, C, BAC, XOM, CVX

Invest in ETFs, Stocks or Both? That is the Question: XLE, XLK, XLV, C, BAC, XOM, CVX - Deciding How Much to Allocate for ETFs and Stocks

A friend once asked me, "Should I invest in Exchange-Traded Funds or Stocks"? There is not a single answer for this as each investor has different risk appetite and different financial set goals. Let’s take XLF for example, which is the financial ETF of its kind. XLF is a fund that is diversified amongst various banks such as Citigroup, JP Morgan, Morgan Stanley, Bank of America, American Express and so on.. But what if you want to have more exposure towards Citigroup or Bank of America, than the rest of the banks. If you buy more XLF, then your risk is spread between all of the aforementioned banks again. In this case, a viable option would be to hold the ETF as well as the stock.

A rule of thumb that I use is the money that I’m going to allocate to the financial sector, I will invest 80% on its particular ETF, (XLF), and then I will spread the rest of the 20% among Bank of America and Citigroup, expecting that (C) and (BAC) will yield higher gains then the entire financial sector.

Same logic could be used with (XLE), the energy ETF that is highly liquid and favored by institutional investors. Let’s say you did your due diligence and found out that Chevron (CVX) will have higher costs internationally and their margins will be affected by a wider range than Exxon’s, plus Chevron’s downstream market has experienced problems such as kidnappings of engineers in Nigeria pipelines. In this case, using the same concept, I would buy 80% of XLE, and put the rest on Exxon (XOM) or short sell Chevron (CVX), depending how you want to hedge your positions.

Overall, I do favor ETF’s over stocks, because a company specific problem would not pose much of a threat to your holdings since the fund is diversified among 9 other companies, so the beta of a stock will be much less than a beta of a volatile stock such as (BAC) or (C).

Other ETFs that are noteworthy of mention are (XLK), which is the Technology ETF that is heavily invested in Google, Apple, Verizon and others. As well as (XLV), which is the Healthcare ETF that is invested in large cap names such as Merck, Pfizer, Johnson and Johnson. With baby boomers retiring by the millions, I see nothing but upside for this baby!

smallcapnetwork.com