Investing in stocks and ETFs are two options for people in Zimbabwe looking to grow their wealth over the long term. While both provide the opportunity to make money through stock market investments, they differ in several ways. Since Old Mutual gave Zimbabwe its first ETF, The Old Mutual ZSE Top Ten ETF (OMTT), we have seen four more ETFs launched. We will look at the difference between investing in stocks and ETFs, and the pros and cons of each option.
Exchange Traded Funds (ETFs)
First of all, what is an ETF? ETF stands for Exchange Traded Fund. An ETF is an investment fund that invests in stocks and other securities. ETFs are traded on stock exchanges like individual stocks, making them easily accessible to individual investors. One of the key advantages of investing in ETFs is that they provide diversification across many different assets, reducing the risk associated with investing in a single stock.
As mentioned before, Zimbabwe currently has five ETFs. The first to launch was the Old Mutual ZSE Top Ten ETF (OMTT), an index fund that invests in the top 10 of the ZSE. An index fund replicates the distribution of a group of stocks or assets tracked by a known index. Second to launch was the Morgan & Co Multi-Sector ETF (MCMS), a managed fund that invests across many sectors. In a managed fund, the fund manager decides the constituents and makes all changes necessary.
Third to launch was the Datvest Modified Consumer Staples ETF (DMCS) which is a managed fund that invests in companies in the consumer staples index. Still, the fund manager decides the distribution of the investment. The Morgan & Co Made In Zimbabwe ETF (MIZ) is a managed fund that invests in Manufacturing companies in Zimbabwe. Finally, the Cass Saddle Agriculture Index ETF (CSAG) is an index fund that invests in the Agriculture Index of the ZSE.
Shares or stocks
On the other hand, investing in individual stocks involves buying shares in a specific company. This can be done through a stockbroker or an online trading platform such as C-Trade or ZSE direct. Individual stocks can provide higher returns than ETFs but also come with a higher level of risk. If the company performs well, the stock price will typically increase, leading to a capital gain for the investor. However, if the company performs poorly, the stock price can decrease, resulting in a capital loss.
Another key difference between investing in stocks and ETFs is the investor’s level of control over the investment. With ETFs, the investor has limited control over the underlying assets, as professional portfolio managers manage the fund. On the other hand, investing in individual stocks gives investors more control over their investments. They can choose which stocks to buy and sell and when. This can protect your investment where a company performs poorly.
In terms of fees, index ETFs typically have lower fees than actively managed funds. This is because ETFs are passively managed, meaning they track a market index rather than actively managed by portfolio managers. As a result, the costs associated with running an ETF are typically lower, leading to lower fees for the investor. On the other hand, individual stocks do not have any management fees, as the investor is responsible for managing their portfolio.
The way to go depends on many factors, but the most significant factor is the individual concerned. How well do you know and understand the stock market? If you’re less than experienced, ETFs are the best entry point. You can learn about the market by buying into ETFs.
Another factor to consider when investing in stocks and ETFs is liquidity. ETFs are highly liquid and can be easily bought and sold on the stock market. This makes them a good option for investors needing to access their money quickly. On the other hand, individual stocks may be less liquid, depending on the size and popularity of the company. This means it may be more challenging to sell the stock, or the investor may need to accept a lower price than they would like.
Finally, it is worth considering your level of knowledge and experience in investing. Investing in individual stocks can be more complex than investing in ETFs and requires greater knowledge and understanding of the stock market. On the other hand, ETFs are a relatively simple investment option, as they provide diversification and are managed by professionals. This makes them a good option for novice investors or those who do not have much time to devote to researching individual stocks.
Investing in stocks and ETFs both have their pros and cons. Investing in individual stocks gives the investor more control over their investment, while ETFs give access to the wisdom of fund managers or the market in the case of index ETFs such as OMTT and CSAG.
