The numbers we would rather ignore
The SPIVA report (S&P Indices Versus Active) analyzes active fund performance against their benchmarks every year. The results leave little room for debate:
These professional managers have teams of analysts, access to proprietary data, decades of experience and sophisticated algorithms. If they cannot consistently beat the market, why would an individual investor?
Why beating the market is so hard
The efficient market hypothesis
In liquid, closely followed markets (S&P 500, TSX), prices absorb nearly all available public information almost instantly. By the time you read a good analysis of Apple, thousands of other investors have read it too and the price already reflects it. Your informational edge is effectively zero.
The hidden costs that add up
Even with no visible commissions, picking individual stocks generates significant hidden costs:
- Bid-ask spread: the gap between buying and selling price costs 0.05% to 0.3% per trade
- Capital gains tax: every sale in a non-registered account triggers tax on 50% of the realized gain
- Research time: analyzing and seriously following 20 companies takes 5 to 10 hours a week. That time has real value.
The psychological biases that sabotage returns
Even if you pick good holdings on paper, the human factor often degrades the outcome:
- Overconfidence bias: "I understand this company better than the market" — rarely true
- Familiarity bias: overweighting Canadian companies, the banking sector, the stocks you already know
- Confirmation bias: seeking out the information that confirms what you already want to believe
- Panic during corrections: selling at the worst moment (the bottom) then buying back too late (after the recovery)
An ETF has no emotions. It does not panic in March 2020, does not dump its positions over a presidential tweet, and does not chase Reddit's hot stocks. That is an underrated structural advantage.
ETFs vs stocks: head to head
| Criterion | ETF (e.g. XEQT) | Individual stocks |
|---|---|---|
| Diversification | 9,500+ global holdings | Typically 10-25 holdings |
| Specific risk | Close to none | High (bankruptcy possible) |
| Management fees | 0.20% / yr | Trading costs + time |
| Time required | Negligible | 5-10 h / week minimum |
| Tax (non-registered) | Low turnover, less tax | Frequent realized gains |
| Psychological biases | Protected (automatic) | Maximum exposure |
| Long-term performance | Whole market, guaranteed | Random, often lower |
When individual stocks can make sense
This is not an argument for banning individual stocks. In specific cases they can sensibly complement an ETF portfolio:
- Companies you understand deeply: you work in the sector, you see competitive advantages the market has not priced in yet
- Limited conviction positions: at most 5-10% of the total portfolio, never more
- Learning purposes: a few hundred dollars to learn how to read financial statements — that is tuition well spent
Verdict: for whom?
The honest conclusion
Investing in ETFs means humbly admitting you do not know better than the market — and profiting from that collective wisdom rather than fighting it. That is not laziness. It is strategy grounded in data.