Why ETF investing is smarter than stock picking

ETF investing has rapidly gained popularity in recent years. Globally, by the end of February 2025, no less than $15.50 trillion was parked in ETFs — a new record according to research firm ETFGI.* Why are more and more investors shifting from individual stocks to broadly diversified funds? The main reason is performance. According to the SPIVA Europe Scorecard, over the past ten years, an average of 93 percent of actively managed equity funds underperformed their benchmark index.** Add to that the lower costs, automatic diversification, and the convenience of a single transaction, and it becomes clear why stock picking often loses out in the long run. In this article, you'll discover how ETFs reduce risk, why the search for the perfect stock is risky, and which historical data convincingly proves this.

Stock picking is attractive but misleading

The illusion of control

Many retail investors and even professional fund managers believe that with careful selection they can beat the market , but the facts convincingly dispute this. According to the SPIVA Europe Year-End 2024 Scorecard, 91% of actively managed global equity funds, expressed in euros, performed worse than the S&P World Index over the entire year 2024. Over a ten-year period, 56.71% of European equity funds underperformed their benchmark index.

These figures illustrate that even professional fund managers struggle to outperform the market. For retail investors, who often have fewer resources and less information at their disposal, it is even more challenging to achieve consistent outperformance.

Risks of individual stocks

Investing in individual stocks involves significant risks. The performance of individual companies can vary greatly, and unexpected events can lead to considerable declines in value. Moreover, it is difficult to predict which companies will be successful in the long term.

An additional risk is limited diversification. By investing in a small number of stocks, you expose your portfolio to specific company or sector risks. This can lead to greater volatility and potential losses.

In contrast to stock picking, investing in ETFs offers broader diversification and reduces the impact of poorly performing individual stocks. By investing in a basket of stocks, as is the case with an ETF, the risk is spread across multiple companies and sectors, contributing to more stable long-term returns.

ETF investing as a rational strategy

What exactly is an ETF?

An Exchange Traded Fund (ETF) or tracker is a listed fund that tracks the performance of a specific market index, such as the MSCI World Index or the S&P 500 . When you invest in an ETF, you are essentially buying a diversified basket of stocks with a single transaction. This automatically provides you with broad diversification of your investments, without needing to delve into individual companies.

ETFs combine important characteristics of stocks and traditional funds:

• Listed: ETFs are traded like stocks, allowing you to buy or sell them at any time at current market prices.
• Transparency: The exact composition of the ETF is public, so you always know exactly what you are investing in.
• Low costs: ETFs generally have lower management fees than traditional actively managed funds. This is because ETFs typically do not require active management, but simply follow an existing index.

One of the main advantages of ETFs is their low cost structure . On average, annual management fees of ETFs are often less than 0.30%, while actively managed funds typically charge between 1.5% and 2%. These lower costs have a significantly positive effect on the long-term return of your investments. Thanks to this cost efficiency, ETFs have become extremely popular in recent years among both retail and institutional investors worldwide.

Advantages of ETFs

Investing through ETFs offers several key advantages that make them an attractive choice for both experienced and novice investors. The three main advantages are:

Criteria	ETF investing	Choosing individual stocks
Diversification	High: One ETF contains dozens to hundreds of stocks, significantly reducing risk.	Low: Each purchase involves one stock, making it harder to spread risk.
Management costs	Low: ETFs passively track an index, resulting in lower average management costs.	High: Transaction costs can quickly add up due to frequent trading and active management.
Simplicity and ease	High: ETFs are easily traded through a single transaction, without complex decisions.	Low: Requires time and knowledge to select, monitor, and manage individual stocks.

This table clearly shows why ETFs are a more rational and efficient choice for many investors compared to selecting individual stocks.
 

         

Long-term vision: the foundation of success

Short-term investing is speculation

Short-term investing may seem attractive, but in reality, it is often speculative and risky. Investors who try to time the market by quickly jumping in and out risk missing the best trading days. An analysis shows that missing just a few top days in the market can drastically reduce total returns. For example, an investor who misses the 20 best trading days over a 20-year period could see their annual return drop from 8% to 3.3%.

In addition, frequent trading leads to higher transaction costs and increased emotional stress, which heightens the risk of impulsive decisions. Combined, these factors make short-term investing more a form of speculation than a thoughtful investment strategy.

Long-term ETF investing

ETFs are ideally suited for long-term investors. They offer broad diversification across various sectors and regions, which reduces risk. Additionally, ETF costs are generally lower than those of actively managed funds, which positively impacts returns in the long run. The annual management fees of ETFs are often less than 0.30%, compared to an average of 1.5% to 2% for actively managed funds.

Moreover, by investing over the long term, you can fully benefit from the compounding effect. By investing regularly and holding those investments for a long time, returns can grow exponentially. This strategy requires discipline and patience but has historically proven to be an effective way to build wealth.

The principle of compound interest, also known as interest-on-interest, means that you not only earn returns on your initial investment but also on the previously accumulated returns. This causes your investment to grow exponentially rather than linearly.

A concrete example: suppose you invest €1,000 at a 5% annual return. After one year, you have €1,050. In the second year, you again earn 5%, but now on €1,050, resulting in €1,102.50. Each year, your return grows further because the earlier returns also generate interest. The longer you invest, the stronger this effect becomes.

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... and he who doesn't, pays it.”
— Albert Einstein

The top 5 companies: an evolution over four decades

Today's leaders are not tomorrow's

Those who invest in individual stocks try to pick tomorrow’s winners. But history shows that even the largest companies rarely maintain their top position. The evolution of the five largest publicly traded companies worldwide over four decades clearly illustrates how market dynamics, innovation, and competition continually reshuffle the hierarchy.

Below you can see how the top five in global market capitalization looked in various decades:

What stands out? No single company consistently remains in the top five. IBM and AT&T from the 1980s have completely disappeared. General Electric topped the list in 2000, but was gone a decade later. The companies dominating today, like Apple, Microsoft, or Amazon, are all tech giants, a sector barely represented in 1990.

These historical shifts show how difficult it is to pick the right individual stocks for the long term. ETFs solve this problem: they automatically adjust to market evolution. Companies that gain importance receive a larger weight in the index. Losers naturally fade into the background. This keeps your portfolio up to date without having to predict who the market leader will be tomorrow.
 

Maximum diversification is the best protection

How ETFs reduce risk

Investing always involves risk. But the way you invest determines how great that risk is. With stock picking, where you bet on a limited number of individual stocks, the risk of loss is significant. One negative quarterly report, a regulatory issue, or a strategic blunder can be enough to cause a stock to plummet by dozens of percent. Think of examples like Wirecard, Nokia, or Credit Suisse: once highly valued companies that largely lost their worth.

An ETF offers a powerful solution. Because an ETF contains hundreds or even thousands of companies, the total risk is spread across various sectors, regions, and company sizes. Even when a few stocks in the ETF perform poorly, the impact on the entire portfolio remains limited. The winners offset the losers. This principle of risk spreading is the core of sound investing.

An example: a global equity ETF based on the MSCI World Index includes companies from the U.S., Europe, and Asia, spread across sectors like technology, healthcare, energy, and consumer goods. This broad diversification ensures that your portfolio can withstand shocks in specific markets, such as a banking crisis or a tech correction.

By using ETFs as the building block of your portfolio, you protect your investments against unforeseen events and increase your chances of stable long-term returns. Instead of gambling on the right stocks, you automatically follow the evolution of the broad market — and that with minimal costs and maximum peace of mind.

Conclusion: Choose efficiency, choose ETF investing

ETF investing is not only simpler, but also more rational than stock picking. By automatically investing in a broad market index, you avoid the many pitfalls of actively choosing stocks:

• Concentration risk: you avoid exposure to a single company or sector.
• Higher costs: you don’t pay management fees for active management.
• Emotional decisions: you automatically follow the market, without needing to choose entry and exit moments.
• Unpredictability of winners: history shows that market leaders constantly change.

As the evolution of the largest companies through the decades has shown, nothing is as changeable as market dominance. What is a market leader today may be irrelevant tomorrow.

With ETFs, you don’t need to make these predictions. Your portfolio adjusts itself automatically:

• Growing companies automatically receive more weight in the index.
• Laggards naturally lose importance.
• Diversification across regions and sectors offers long-term stability.
• Low costs and transparency enhance net returns.

Thanks to these features, ETF investing is a powerful tool to build wealth consistently, regardless of your experience or investment style.

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Frequently Asked Questions in Investing in ETF

Is ETF a good investment?

Yes, ETFs are generally considered a good investment, especially for long-term investors. They offer broad diversification, low costs, and transparent holdings, which helps reduce risk and improve performance over time. Since ETFs track market indexes, they avoid the pitfalls of active management and emotional decision-making. Their passive nature often results in more stable returns, making them suitable for building wealth gradually. However, like any investment, ETFs carry market risks, so it’s important to align them with your financial goals, risk tolerance, and time horizon.

Are ETFs good for beginners?

ETFs are ideal for beginners due to their simplicity and diversification. By investing in a single ETF, you gain exposure to dozens or even hundreds of companies across different sectors or regions, reducing the need for individual stock selection. ETFs are also easy to buy and sell on the stock exchange, like regular shares, and typically come with lower fees than actively managed funds. Beginners benefit from the low maintenance and reduced risk associated with ETFs, making them a practical and accessible entry point into investing.

How are ETFs taxed in Belgium?

In Belgium, ETFs are subject to several taxes. First, the stock exchange tax (TOB) ranges from 0.12% to 1.32% depending on the ETF type and listing location. Second, distributing ETFs pay a 30% withholding tax on dividends. Third, if more than 10% of the ETF is invested in bonds or other interest-bearing assets, the Reynders tax applies: a 30% tax on capital gains from the bond portion upon sale. Accumulating ETFs that reinvest income internally are usually more tax-efficient, but exact tax impact depends on the ETF’s structure and your personal profile.

How much tax will I pay on my stocks?

In Belgium, capital gains on stocks are generally tax-free for private individuals, as long as the trades are not considered speculative or professional in nature. However, you will pay a stock exchange tax (TOB) of 0.12% to 0.35% when buying or selling shares, depending on the transaction. Dividends received from stocks are taxed at a flat rate of 30% via withholding tax. If you are an active trader or if your transactions suggest professional activity, tax authorities may assess additional taxes. Always consult a tax advisor for personalized guidance.

Are dividends taxed in Belgium?

Yes, dividends are subject to a 30% withholding tax in Belgium. This tax is automatically deducted before the dividend is paid to you. It applies to dividends from both Belgian and foreign stocks and funds, including ETFs. However, some investors may be eligible for a partial refund or deduction depending on their personal tax situation or if tax treaties exist with the country of origin of the dividend. In the case of accumulating ETFs, which reinvest dividends internally, no immediate dividend tax is due, making them more tax-efficient for Belgian residents.

*https://etfgi.com/news/press-releases/2025/03/etfgi-reports-assets-invested-global-etfs-industry-reached-new-record

**https://www.spglobal.com/spdji/en/documents/spiva/spiva-europe-year-end-2024.pdf