ETFs vs individual stocks example Manulife

Hey,

Thanks for the great content.

I just have a question regarding ETFs vs stocks in a situation where I am a long term investor (ie. looking to hold the investment for 20+ years). I understand that ETFs are a good way to play a sector which helps take away some of the volatility that may be associated with an individual stock but I was wondering what you would advise for lets say the below example:

I have been looking to buy individual shares in Manulife but then came across a covered call ETF (FLI.TO) which includes North America’s 10 biggest life insurance companies. Given the covered call strategy helps take care of volatility with markets, this ETF has been issuing a relatively high dividend yield for quite some time. Sure, it may not have the capital growth over the years but the yield is good and in safe companies. What do you guys suggest in these situations? Given that I have a long time horizon, would I be better off investing in this ETF or going solely with Manulife? The idea of compound interest in both situations is the same, so if I keep reinvesting the ETF dividends that are consistently high would that work out better in the long run at the time of retirement compared to the possible fluctuations with Manulife?

Sorry for the long winded question. If it is not clear please let me know. The reason I got to thinking about this is because of what happened this last week with RioCan’s distribution which got slashed by 33%. That is a significant blow to a yield that some rely on. But if you invested in something like an ETF (such as IDR as I previously mentioned in another post) this would not have occurred because their dividend has been consistent over the last 7+ years. Although the yield may not drastically increase over the years, at least it’s safe and consistent).

Hope this makes sense.

Thanks for your guys hard work, you help a lot of people especially during these difficult times.

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Asked on December 10, 2020 11:39 pm

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Hi Mat,
A few days ago I received an email which mentioned REITs and their breakdowns etc. I don't know how to access that information on Stocktrades.ca

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Posted by Kourosh Fallahzadeh

Answered on December 12, 2020 4:03 pm

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Hi there,

It is a really good question. ETFs in of themselves are not bad products - and I much prefer them to mutual funds as they have lower fees. Likewise, there is nothing wrong with ETFs that employ a covered call strategy which is what allows them to pass on more cash to shareholders via a higher yield. In my opinion, ETFs are a great option for investors to gain exposure to a particular industry, sector or index without having to keep on top of individual positions. If investors don't have the time and can't put the effort into doing their due dilligence on indivdual stocks, than they are solid options.

However, individual stocks do have advantages - two in particular. First, those who pay a dividend and grow it yearly are quite attractive as most ETFs keep their dividend steady. So while Manulife's yield may not be as high, investors do benefit from YOY growth. Eventually, Manulife's yield could surpass that of the ETF if you have a long-term time frame and it maintains its rate of double-digit growth. Secondly, investors can replicate the additional yield by writing covered calls themselves on their Manulife position.

Secondly, you have greater potential to outperform by holding individual stocks - assuming you have a solid methodology behind your stock selections. Case in point, when looking at TOTAL return - which includes the dividend, Manulife has outperformed of FLI. A mistake income investors make (especially those with a long time frame) is to ignore total returns and focus solely on the income. While income is more important in retirement or if you rely on dividend payments for your day to day living, total return should be the focus. Furthermore, you can actually sell your stocks to generate income - which is why capital appreciation is also important.

Over the past five years, Manulife's total return is 35.02% vs 11.35% for that ETF. This is not to say MFC will out perform moving forward, but it is an important consideration when making your decision. I should add, there is nothing wrong with holding ETFs. For example, for years I held REIT ETFs because I didn't want to have to stay on top of each REIT sub industry and it was easier to hold an ETF that had a weighting in all sub-industries. ETFs certainly have a place, it is just important to ensure you are taking the whole picture into account.

Mat

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Posted by Mathieu Litalien

Answered on December 11, 2020 4:43 am

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