ETFs vs stocks remains one of the most debated topics among investors looking to grow their wealth. When it comes to investment performance in 2025, the choice between these two options can significantly impact your returns. While ETFs offer instant diversification across multiple companies or sectors, individual stocks provide the opportunity to capitalize on specific company growth. The investment landscape has evolved considerably, with new market trends and economic conditions affecting both investment vehicles differently. Financial experts often disagree on which option delivers superior returns, specifically when accounting for risk tolerance, tax implications, and management effort. This comprehensive comparison will examine performance data from 2025, analyze risk-adjusted returns, evaluate cost structures, and ultimately help you determine which investment type might better align with your financial goals.
Understanding the Basics: ETFs vs. Stocks
The fundamental distinction between ETFs and stocks lies in their very nature - one offers a package of investments, the other represents ownership in a single company. Before evaluating which might perform better financially, let's unpack how each investment vehicle actually works.
What is an ETF and how does it work?
An Exchange-Traded Fund (ETF) is a basket of securities that trades on exchanges just like individual stocks. ETFs combine features of mutual funds with the trading flexibility of stocks, allowing investors to buy or sell shares throughout the trading day at market prices. Unlike mutual funds that trade only once daily after market close, ETFs provide real-time pricing and intraday trading options.
ETFs typically hold multiple underlying assets - stocks, bonds, commodities, or other investments. When you purchase ETF shares, you own a fraction of the underlying investment pool rather than the individual assets themselves. Most ETFs are passively managed, designed to track specific indexes like the S&P 500. The first U.S. ETF was the SPDR S&P 500 ETF (SPY), which still tracks the S&P 500 Index today.
Furthermore, ETFs are professionally managed by teams of experts working to meet goals outlined in the fund's prospectus. They charge an expense ratio covering management fees and operating expenses. Additionally, ETFs utilize a tax-efficient "in-kind redemption" process that helps limit capital gains distributions, potentially enhancing after-tax returns.
What is a stock and how does it function?
A stock represents fractional ownership in a specific company. When you purchase shares of stock, you become a part-owner or shareholder in that business, with rights to a proportional share of its assets and profits. Essentially, stocks are how companies raise capital without taking on debt.
Publicly traded stocks are bought and sold on exchanges like the New York Stock Exchange or Nasdaq. The primary motivation for stock ownership is building wealth through two potential mechanisms: price appreciation (selling shares at a higher price than purchased) and dividend payments (distributions of company profits to shareholders).
Over the long term, the average annual stock market return is 10%, falling to 7-8% after adjusting for inflation. This means $1,000 invested in stocks 30 years ago could be worth nearly $8,000 today. However, this represents an average across many companies - some stocks fail completely while others deliver spectacular returns.
Common stockholders typically receive voting rights proportional to their ownership level, allowing input on major company decisions. In contrast, preferred stockholders generally receive fixed dividends but usually lack voting privileges.
Key structural differences between ETFs and stocks
The most significant distinction between ETFs and stocks centers on diversification. ETFs provide instant exposure to numerous securities in a single transaction, whereas stocks offer concentrated exposure to one company. This fundamental difference creates several important contrasts:
Risk profile: ETFs distribute risk across multiple securities, diluting the potential negative impact from any single holding's poor performance. Individual stocks carry higher concentration risk since their value depends entirely on one company's performance.
Management approach: ETFs are professionally managed, with most following passive strategies tracking established indexes. Individual stocks require investors to research and monitor specific companies.
Cost structure: ETFs charge expense ratios for management services, while direct stock ownership doesn't involve ongoing fees beyond initial trading commissions.
Control: Stock ownership provides direct voting rights in company decisions, whereas ETF shareholders don't have direct influence over the individual companies within the fund.
Despite these differences, both investment vehicles trade on exchanges with intraday pricing and liquidity, giving investors flexibility to adjust positions throughout the trading day in response to market conditions.
Performance in 2025: Which Delivered Better Returns?
The 2025 investment landscape has presented a challenging environment for both ETF and stock investors, with market volatility driving significantly different outcomes across investment types. Looking at raw performance numbers reveals surprising disparities between broad market index funds and individual securities.
S&P 500 ETF vs. Top Performing Stocks
In early 2025, the S&P 500 index and its tracking ETFs have struggled, posting negative returns. As of April 2025, the S&P 500 was down 3.56% year-to-date, while its equal-weighted counterpart showed a slightly better performance at negative 1.27%. Popular S&P 500 ETFs showing similar declines include Vanguard S&P 500 ETF (VOO), SPDR S&P 500 ETF Trust (SPY), and iShares Core S&P 500 ETF (IVV).
Conversely, individual stocks have delivered dramatically different results. The top performers in the S&P 500 by one-year return include Palantir Technologies (PLTR) with an astonishing 452.94% gain. Other standouts include GE Vernova (160.44%), Texas Pacific Land Corporation (138.17%), and Howmet Aerospace (129.69%). Even more remarkable, among companies with at least $1 billion market cap, Diginex Ltd. posted a staggering 2,065.6% year-to-date return through April 30.
Notably, the "Magnificent Seven" tech stocks that powered markets in 2024 have underperformed in early 2025. Tesla, for instance, despite a strong one-year performance of 56.33%, had fallen 30.32% year-to-date by early May.
Volatility-adjusted returns: Sharpe Ratio comparison
When assessing investment performance, raw returns tell only part of the story. The Sharpe ratio—which measures excess returns relative to volatility—provides crucial insight into risk-adjusted performance.
For Sharpe ratios, anything above 1.00 is considered good, while readings above 2.0 are very good. Most investments typically fall into the 1.00-1.99 range. When comparing two investments with identical returns, the one with lower risk (standard deviation) will have a better risk-adjusted return.
Looking at historical data, high-volatility funds have significantly outperformed low-volatility funds on an absolute basis. Over the past decade, high-volatility funds earned annualized returns of 15.89% compared to just 5.16% for low-beta funds. This pattern holds internationally, where high-volatility funds returned 5.81% annually versus 2.51% for low-volatility funds.
Nevertheless, low-volatility strategies have often provided better risk-adjusted returns than the broad market, primarily due to their bias toward stocks with low valuations and high profitability.
Dividend yield trends: ETFs vs. individual stocks
For income-focused investors, 2025 has offered compelling dividend opportunities in both ETFs and individual stocks. The highest-yielding dividend ETF as of May 2025 was the Invesco KBW Premium Yield Equity REIT ETF (KBWY), offering an impressive 9.99% yield.
Other notable high-yield ETFs include:
- Invesco S&P SmallCap High Dividend Low Volatility ETF: 7.69% yield
- SPDR Portfolio S&P 500 High Dividend ETF: 4.51% yield
- Schwab US Dividend Equity ETF: 4.02% yield
These dividend ETFs generally offer significantly higher yields than the S&P 500's approximate 1.4% yield. Furthermore, many experts consider dividend-paying companies superior long-term investments, with research showing they've outperformed non-dividend payers by more than 2-to-1 over the past 50 years (9.2% versus 4.3% average annual returns).
Income-oriented investors have increasingly turned to specialized ETFs in 2025, particularly those offering downside protection alongside income. This shift partly stems from bond market volatility, which has pushed investors toward equity-based income alternatives.
When comparing overall returns, whether dividend ETFs outperform individual dividend stocks depends largely on specific securities, investment strategies, and market conditions. While individual dividend stocks may offer higher growth potential, ETFs provide diversification that can reduce risk while maintaining reliable income.
Risk and Diversification: How They Stack Up
When considering investment options, understanding the risk profile of each vehicle is paramount for building a successful portfolio. The fundamental risk difference between ETFs and stocks stems from their inherent structure and can significantly impact long-term investment outcomes.
Single-stock risk vs. diversified exposure
The primary advantage ETFs offer is built-in diversification. Passive index ETFs provide access to many companies in a single transaction, effectively removing single-stock risk—the exposure to just one company's performance. This diversification across numerous securities dilutes the potential negative impact of any individual security's poor performance.
Individual stocks, alternatively, concentrate risk in a single company. Research indicates investors need between 20 and 100 stocks to achieve adequate diversification. First-time investors or those with limited capital often struggle to build sufficiently diversified portfolios through individual stocks alone, accordingly making ETFs a practical solution.
Ultimately, the concentration in individual stocks creates higher potential for both outsized returns and dramatic losses. Indeed, this explains why ETFs are generally considered less risky than individual stocks, though they typically offer more modest returns.
Market volatility: How ETFs and stocks respond
During periods of market turbulence, ETFs and stocks exhibit distinct behavior patterns. Although ETFs are designed to provide stability through diversification, research suggests they may sometimes amplify market-wide volatility.
Studies examining index-based ETFs found their presence increases underlying securities' overall volatility. Furthermore, when one symbol in an ETF portfolio experiences a mini flash crash, other symbols may experience momentary price changes in the opposite direction. This interconnectedness means ETFs can potentially spread volatility events throughout their portfolios.
Meanwhile, individual stocks respond to volatility based on company-specific factors alongside broader market movements. Their prices can fluctuate dramatically on earnings announcements, management changes, or industry developments, regardless of overall market conditions.
Portfolio impact: Risk-adjusted allocation strategies
Savvy investors frequently combine both instruments to optimize their portfolios. A prudent approach involves considering your risk tolerance and investment objectives when determining allocation between ETFs and stocks.
Many financial experts recommend using ETFs as a foundation for a diversified investment strategy. From this baseline, investors can add individual stocks to express specific views on companies or sectors. This hybrid approach helps manage overall portfolio risk while allowing for strategic positioning in individual companies with growth potential.
Risk-adjusted allocation strategies often focus on:
- Managing diversification based on correlation of assets rather than simply counting the number of holdings
- Regularly rebalancing to maintain desired allocations as market conditions change
- Minimizing stock-specific risk through strategic ETF usage
- Allocating more conservative assets (like bond ETFs) to shorter time horizons and more aggressive holdings to longer-term goals
By thoughtfully combining these investment vehicles, investors can create portfolios aligned with their unique risk tolerance and financial objectives.
Cost and Tax Efficiency: What You Actually Keep
Beyond raw performance figures, understanding the costs and tax implications of ETFs versus stocks reveals what you ultimately keep from your investment returns. After all, what matters most is the money that stays in your pocket.
Expense ratios: ETFs vs. direct stock ownership
The clearest cost distinction between these investment vehicles lies in expense ratios. ETFs charge annual fees to cover management and operational costs, expressed as a percentage of assets. In 2024, average ETF expense ratios stood at 0.48% for index ETFs and 0.69% for active ETFs. In comparison, stocks don't have expense ratios—once you own shares, no ongoing fees apply.
These seemingly small percentages can substantially impact long-term returns. Consider a $100,000 investment generating 4% annual returns over 20 years: with no costs, you'd have approximately $219,000, but with a modest 0.5% expense ratio, your returns would be about $20,000 lower.
Capital gains taxes: In-kind redemption vs. stock sales
Perhaps the most significant advantage ETFs offer is their tax efficiency. Unlike mutual funds, ETFs utilize a unique "in-kind redemption" process that minimizes taxable events. Consequently, in 2023, merely 2.5% of all ETFs distributed capital gains compared to 31.5% of mutual funds.
This efficiency stems from:
- Low portfolio turnover reducing realized gains
- Secondary market trading that leaves fund holdings untouched
- The ability to transfer out lowest-cost-basis securities during redemptions
As a result, ETF investors typically control when they realize gains—usually only when selling their shares. With individual stocks, investors similarly pay capital gains taxes only upon sale, making both options relatively tax-efficient compared to mutual funds.
Brokerage fees and trading costs in 2025
The commission landscape has transformed dramatically, with many brokerages now offering commission-free trading for both ETFs and stocks. Nonetheless, hidden costs persist through bid/ask spreads—the difference between buying and selling prices.
For frequently traded investments, these spreads can accumulate substantially. ETFs tracking illiquid assets typically have wider spreads than those following major indices. Moreover, individual stocks often have wider spreads than popular ETFs, especially for small-cap companies.
Investor Control and Flexibility
Both ETFs and stocks provide investors with various control mechanisms, although they differ substantially in how much hands-on management they require. The flexibility offered by each investment vehicle impacts not only your potential returns but also your day-to-day interaction with your portfolio.
Trading options: Limit orders, stop-loss, and intraday pricing
Both ETFs and stocks trade throughout market hours with continuously updating prices, giving investors significant flexibility compared to mutual funds that only trade once daily at market close. First and foremost, this intraday trading enables investors to use sophisticated order types including:
- Market orders: Execute at the next available price with no price guarantee
- Limit orders: Set maximum purchase prices or minimum selling prices
- Stop orders: Trigger at specific prices, then execute as market orders
- Stop-limit orders: Combine stop prices with limit restrictions to control execution prices
These order types provide precise control over trade execution. For instance, a stop-limit order on a stock allows you to set both the price that triggers your trade and the maximum/minimum price you'll accept—protection that's particularly valuable during volatile markets.
Automatic investing: ETFs vs. stocks
In terms of ongoing management, ETFs generally require less attention than individual stocks. ETFs represent a "set-it-and-forget-it" approach where fund managers handle the underlying security selection. Besides providing built-in diversification, this professional oversight reduces the time investors need to spend monitoring their investments.
Conversely, stock investing demands more extensive research and management. Investors must screen opportunities, analyze company fundamentals, and make ongoing decisions about position sizing and timing. Of course, stock management doesn't necessarily mean constant monitoring—automated tools like stop losses can help manage positions without requiring investors to be "glued to screens".
Research and management: DIY vs. professional oversight
As such, the fundamental distinction comes down to who makes the selection decisions. With ETFs, professional fund managers research, buy, and sell holdings according to the fund's objectives. In fact, this team-based approach may benefit investors lacking the time or expertise to analyze individual companies effectively.
Ultimately, stock investors gain complete control over their investment decisions but must accept greater responsibility for research and analysis. Given that more than 80% of professionally managed funds can't consistently outperform the market, many investors choose low-fee, market-tracking ETFs as their primary investment vehicle.
Conclusion
As we compare ETFs and stocks in 2025, the data clearly reveals there's no universal "better" option for all investors. Instead, each investment vehicle offers distinct advantages depending on your financial goals, risk tolerance, and preferred level of involvement.
Performance metrics from 2025 demonstrate how individual stocks like Palantir Technologies (with its astonishing 452.94% gain) can dramatically outperform broad market ETFs, which showed negative returns early in the year. However, this outperformance comes with significantly higher volatility and concentration risk. Therefore, many investors opt for a balanced approach, using ETFs as portfolio foundations while selectively adding individual stocks for growth potential.
The cost comparison between these investment vehicles remains straightforward. ETFs charge expense ratios averaging 0.48% for index funds, whereas direct stock ownership involves no ongoing fees beyond initial trading commissions. Additionally, both options offer tax advantages compared to mutual funds, though ETFs gain an edge through their unique in-kind redemption process.
Beyond performance and costs, your decision should reflect your personal investment style. ETFs provide professionally managed diversification with minimal research requirements, making them suitable for passive investors. Conversely, individual stocks offer complete control over selection and potentially higher returns but demand more extensive research and monitoring.
The most effective strategy for many investors combines both approaches. This hybrid method allows you to gain market-wide exposure through low-cost ETFs while simultaneously targeting specific companies with growth potential. Ultimately, success depends not on choosing one vehicle exclusively but rather on thoughtfully integrating various investment types based on your unique financial situation, time horizon, and investment objectives.