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I am mostly interested in long-term dividend-paying investments.

Why only dividend stocks? The value of a stock goes down when they pay a dividend, so dividend stocks are (in my opinion) more appropriate for short-term income needs. Long-term you should be looking at total return (dividends + price growth). Plus, capital gains are taxed less if the stock is held for more than one year (this does not matter if you're talking about a tax-deferred account).

"You can't beat the market";

This is a theory that only applies to long-term diversified investing. Certainly individual stocks can perform better then the market, but the more you diversify, the closer you get to "market" performance.

Historically better than individual stock investments.

Again, there are individual stocks that outperform ETFs - ETFs just are more diversified, resulting in more of an average return.

If I start reading that "ETFs are the new paradigm", I'll think that a market crash is imminent.

Well, remember that ETFs just contain stocks within them, so I don't see how ETFs can be "overbought" (which would be the premise of a market crash) without the individual stocks being overbought.

Why not make my own portfolio? I could simply look at the stock ratios of the major ETF trackers and buy stocks with similar ratios.

Many ETFs contain hundreds of stocks. I suspect that transaction fees would be significantly higher, plus it would be a lot more work on your end.

I like to be able to reinvest the dividends as soon as I get them.

Many brokers will do this for you, even with ETF.

Neither one is "fundamentally better." Picking stocks is hard, which is one reason why good asset managers make millions of dollars. There's nothing wrong with using ETFs as easy diversification and to avoid the hard work needed to pick "good" stocks. But it is possible to beat them with your own stock selection (and probably a little luck :-) )

The quick and dirty answer to your question is no.

An ETF is not company equity. Is pizza fundamentally better than pepperoni?

When you dig deeper in to the "you can't beat the market" it's REALLY about fees. Passive index tracking funds, either exchange traded or mutual funds, have low fees. If I can buy an actively managed fund that seeks to beat the S&P500 by also only holding large cap US company stock for an expense ratio of 0.9%, why not buy the index ETF for 0.04%? The active fund would have to beat the S&P500 by 0.86% every single year for 40 years and that's just statistically unlikely.

When you read the "active managers can't beat the market" what's often left out is "net of fees." Bridgewater's Alpha Fund has done very well against the S&P500. In fact, the alpha fund 2018 return was +18.5% compared to -4.5% from the S&P500. But, when you look over an extended timeframe and consider your actual and expected costs there's a different story.

ETFs are not all the same. ETFs are not "lower risk" by default. An oil ETF has a materially different risk profile than SPY. BUT, buying and rolling over your own oil futures contracts will take a lot of capital to start and likely carry costs in excess of just buying USO. Investing in Brazilian companies, or the Japanese Utilities industry, is difficult and expensive to do as an individual. I'm sure there are ETFs for both.
Will these ETFs "beat the market"? Maybe, but they're not designed to. All ETFs are not broad index tracking ETFs, a lot of funds will follow some theory. You need to read the prospectus for the fund and find out what it's doing.

Many discount brokers have a list of Mutual Funds and ETFs that they will trade for no cost. Getting the money in to the market with no cost, in to a broad market index tracking fund with basically no maintenance fee is hard to beat. If you have a low trading commission of $5 per trade, but you want to routinely invest $250 every other week, you give up 2% of your investment off the top. Over a long time frame it is extremely unlikely for you to beat the market return and a 0.04% expense ratio when you give up 2% of all of your invested dollars; ignoring the fact that you will eventually have to sell these investments and incur sale commissions too.

TONS of people beat the market. A friend of mine bought too much Netflix when it was $15 or $20 per share. She has crushed the market. It was by accident, and too much of her wealth is in Netflix, but she has beaten the market to death. Can you routinely pick the Netflix out of all the potential investments? Probably not.

A couple books I would recommend are "A Random Walk Down Wall Street" and "The Money Game." Most people don't have the emotional fortitude to really handle their own investments. Most of what you will read as investment advice is directed at those folks. If you've got your proper emergency fund, got your retirement funds and contributions on track, and you understand the risks of investing in the particular thing you're deciding to invest in, go for it.

Can you beat the market by actively trading your own retirement fund? Probably not, but that doesn't mean you shouldn't keep your own brokerage account and make some investment decisions for yourself while your long term money sits in low cost market index funds.

Because a few dozen companies randomly chosen from widespread market show the same gain in the long term as all the indices (Dow, SP500, etc), I don't think that fundamentally you'll win or lose anything. ETFs provide a wider diversity of shares.

Suppose you have 30 stocks in your portfolio. If one of them goes bankrupt (see Enron), then you'll lose 1/30 of your portfolio which is ~3% of assets. On the other hand, an ETF may have hundreds of companies so losing one company is nothing.

You've mentioned no significant fees with your investing. It would be great not to have to pay commission but do you really in such situation? Funds like Vanguard usually pay lower commissions than you will.

the liberty to buy / sell any stock is a disadvantage for me because you'll have the temptation to sell or buy the stocks. In most cases it's a way to lose money rather than earn it.

"everyone" starts thinking that with ETFs they are going to be rich. I suppose it's a wrong attitude to the market. In my opinion, investing helps to avoid becoming a pauper rather than becoming rich.

Let's break this down into some of your premises and some of the external premises you seem to believe in:

• You seem to be a fundamental analyst/investor.


• You want to buy and hold, only selling a company if it gets fundamentally worse.


• You want to own parts of a company, not just speculate with them.


• You are interested in dividends, which is the way a businessperson looks at it, and also some investors.

With that said, you seem to look more at the business side of things than the speculative side of things. You want to be a businessperson that owns a fraction of ownership of a company, looking at it exactly the same way a businessperson with a big share of a company would look at.

Now I'd like to discuss two of your ETF premises that I disagree with:

• You can't beat the market.


• If "everyone" starts thinking that with ETFs they are going to be rich, things will go wrong sooner or later.

First of all, you absolutely can beat the market. You can't beat the market if you don't know how to analyze it and make decisions. A quick trip to the library will prove that thousands of people have beaten and continue to beat the market everyday. An uneducated person can't beat the market in the long term, that's for sure. Someone with no interest in investing can't beat the market. ETFs are great for these folks.

Second of all, things shouldn't necessarily go wrong if "everyone starts buying ETFs" (I'd agree with the statement if you were talking about individual stocks), due to the principle that ETFs track indices, which typically somehow track the economy as a whole and all economies grow in the long term (note the "long term"). The nature of any economy is to grow, so if an ETF gets hit really hard and it tracks an index, the index probably is getting hit really hard as well. If the index is a broad one (e.g. S&P 500), it probably means the economy, in turn, is going down. Well, there have been several crises in history but the economy has always bounced back. You may lose a lot of money for months or even years, but it does bounce back simply because it's the nature of any economy to grow in the long term. I particularly believe that, if the global economy (or any economy for that matter) goes down really hard in the really long term (which would materialize your belief that too many ETF investors are a bad thing), then it's the end of the world as we know it and it no longer matters whether you have money in ETFs or not (think what would happen if the S&P 500 went down 50% and stayed there for 15 years).

With all that said, and from what I could tell about you through your question, here are my two cents:

• You can beat the market if you pick and choose the right stocks. You seem to want to do exactly that.


• Imagine if, ten years ago, you really believed Amazon's mission and proposal. You knew the tech industry, you did the math, you analyzed Amazon's fundamentals, and made a life-long decision to invest €40,000 in it. Today, you'd have over €1,000,000.00. If that's not beating the market, I don't know what is.


• ETFs are a great way of diversifying and therefore reducing your risk. This is great if you don't have the time or interest to invest.


• Diversifying means you will inevitably go with a certain industry or the whole economy, depending on what your ETF is tracking. Note that this can be good or bad.


• As a businessperson, you may want to analyze dozens of fundamental criteria and business criteria and make a decision on only a few or half a dozen stocks, and that's OK. As I implied above, it is exactly like having some money saved over and then deciding that you want to open a bakery or a smartphone app startup: you put money into a business and you expect returns from it. Except that you own maybe 0.001% of a company worth 10 billion instead of owning 100% of a company worth 100 thousand. I suggest doing an internet search on what Warren Buffett has to say about diversification.


• You can still "get rich" buying ETFs, just not as rich as you would if you bet on the right company.


• In the long term, you are more likely to make a lot more or lose a lot more by creating your own portfolio than by buying an index-tracking ETF.

As someone with a similar profile and similar goals as you, I have made the decision to fundamentally analyze the market and buy stocks myself.

There are wide range of ETFs, in the context of your question, I assume you're talking about passively managed ETF that tracks an index (e.g. S&P 500).

Are index ETF fundamentally better?

The short answer is no, it's just a market average, but I will say it's one of the most amazing invention if you look at it from the historical context.

According to my quick google search, it was 1975 when John Bogle first invented low fee index mutual fund, and the first S&P 500 ETF (SPY) was not created until 1993.

Imagine you are a small investor in 1975 and wanted to invest in stock (in a diversified way), what were your choices? Discount electronic brokers were not available (Etrade was founded in 1982), human brokers commission were expensive, shares were mostly traded at multiple of 100 shares (and it didn't make sense to trade less because of the commission anyway). All of these were barriers to you, as a result, your only reasonable choice was probably put your money to a mutual fund, accepted whatever fee they charge, and pray for the manager doing a good job for you. Low cost index fund offered you a second simpler and likely better choice at that time.

Are index ETF still better than individual stock nowadays for the reasons you list?

Let's see.

"You can't beat the market";

Although I cannot be completely sure, if "the market" means S&P 500 imo it's easy to beat by screening off some bad companies from S&P 500 (Use an online screening tool, cross out companies that have low revenue growth & no dividend & low historical return & whatever reasonable criteria you want to use) and diversified your portfolio among others.

The simplest examples are DIA and QQQ (ETF that tracks Dow and Nasdaq), they both beat SPY by about 1% a year (Use this to check) on average for 20 years, both are indices that track fewer number ( and therefore slightly higher average quality) of companies.

I am confident that you can do even slightly better by picking stocks yourself rather than following another index.

Easier and cheaper to invest in foreign countries or specific sectors;

Yes these are main reasons I use ETF to invest in foreign equities and junk bond market.

Lower risk;

This is a common misconception. Because most stocks are positively correlated with correlation coefficient about 0.2~0.5 (Use this to check). As a result diversified yourself in 500 companies is not going to lower the variance of the portfolio by much compare to diversify in 20~30 companies.

Historically better than individual stock investments.

This is not well defined, depends on which stock you compare to.

Why not make my own portfolio?

I am using almost exactly the strategies you describe with my little ~$10000 portfolio in a 0 commission brokerage account now, so yes imo it's at least worth a try. :)

Keep in mind though,

1. Bid-ask spreads, and exchange clearing fees are still small hidden fees.




2. When you re-balance portfolio by selling something for a profit, you have to pay tax.




3. It might be more valuable to put time into work, career development, etc. instead of researching how to beat S&P500 by a few percent on a small size portfolio. :)

Cheer!

There are only two free lunches in investing: low costs and diversification.

Typically, ETFs have a management fee. So, you are paying both the stock exchange buying/selling/bid-ask-spread costs, and also the management fee of an ETF. If you pick individual stocks, you are paying only the stock exchange and bid-ask-spread costs. Are the costs lower in stock-picking than in ETF? It depends on the fee schedule of your stock broker, and the amount of money you have to invest. I would say that for any reasonably high amount of money to be invested for any reasonable time horizon, cost-wise you're better off by stock-picking and rebalancing your portfolio by directing new investments to the stocks that have underperformed for no apparent valid reason at all.

What you lose is thus the management fee. However, with ETFs, what you gain is excellent diversification. Usually, it isn't feasible to reproduce the diversification of an ETF by stock-picking.

Note that diversification doesn't improve your return, it reduces your risk (but that is equivalent, as with reduced risk you can afford to have a bigger share of stocks in your portfolio and less cash).

Whether the better diversification of ETFs more than outweighs the management fee depends so much on the circumstances that it's impossible to answer in a general manner.

Also, if the ETF is a synthetic one, based on derivatives, it may have some hidden risks not seen in the day-to-day yield variance. Before investing in any ETF, read carefully the investment policy!

Not better fundamentally. Fundamental risks are the same, plus there adds the risk of two counterparties: "holder" and "controller". If entity is physical, your holder is also probably "outsourcing" the work of keeping things to another agent. Next, consult with prospect papers of exact ETFs you wish to own.

Many great answers in here, I'd just like to address the point If I start reading that "ETFs are the new paradigm", I'll think that a market crash is imminent.

I agree that ETFs are a great invention and allow you to quickly have a diverse portfolio; however, if everybody is a passive investor holding ETFs, then perhaps you should be scared.

For one, that means everybody is holding the same thing—thus the benefit of diversification dissipates. The premise of diversification relies on different assets having different cross-correlations; however if everybody holds the same ETF then during bull and especially bear, everybody will be buying and selling ETFs in the same direction.

The second point would be the loss of information in the market. Yes, passive investments tend to outperform active on average, due to many reasons including fees, turnover, and timing. However, active investing requires deep-dive analysis into the individual assets, and thus provide useful information about the assets into the market. Without active investing, every ETF-holder will be a passive investor at the sidelines, and there will be little to no one providing useful information about the market. A Google will look like a Netflix, and a Netflix would look like a Google. That is a scary proposition.

So yes, I do agree with you on having a healthy dose of skepticism with ETFs.

I'd like to expand a bit on

 Easier and cheaper to invest in foreign countries or specific sectors

IMHO one major hurdle to a single private person diversifying their investments is that tax laws are different across the world (even within the EU).

• As a consequence, you may have to pay more taxes on foreign capital gains


• And, moreover, withholdings can be substantially higher than what you actually have to pay: in that case, you have burocratic hassle (of varying size) to get your tax returns.


• For "normal" shares this depends on the country of the business you hold shares in as well as country of your brokerage account and your tax "home country".


• Dividends may be different here (worse) than realized gains by selling from a domestic brokerage account.


• 
  

  With ETFs, there's yet another country coming into this: the country where the ETF is based.
  
  Whether that helps or hurts (as in adding another layer of burocratic tax duties) depends:

  
  
  
  • it may help if the net burocratic result for you is that you have foreign capital gains burocracy with at most one country (the one where the ETF resides) but not with a variety of foreign countries.
  
  



• Taxation for "normal" shares and their dividends can work substantially differently from ETF taxation (And within ETFs, physical replication may be treated differently from synthetic replication.)
  
  E.g. in Germany, a stock I hold while it gains is an unrealized gain and thus not subject (yet) to taxation: taxes are due on sale. But for ETFs, there are annual tax prepayments on the gains (for ETFs that do not pay dividends) which are calculated against actual gain at sale in order to make them behave more like dividend-paying ETFs in taxation.
  
  For a while we had tax laws for ETFs that lead to substantial differences in the amount of burocracy depending on the ETFs country of residence and dividends vs retention of profits.

Bottomline: find out how your legislation treats shares vs. ETF wrt. tax burocracy.

(Of course that can change significantly over time)