Financial advisors use their expertise to help manage, preserve, and grow their client’s wealth.  While this is their primary goal for all clients, high-net-worth individuals often have more intricate and nuanced financial needs.

With over 15 years in the industry, Nicole Sennett has worked with many affluent clients throughout her career. Her biggest takeaway? There’s no one-size-fits-all solution when it comes to investing. While passive Exchange-Traded Funds (ETFs) are the default choice for many portfolios, Nicole Sennett prefers high-quality stocks for her high-net-worth clients.

Below, we’ll explore why Nicole’s active approach helps her generate higher returns for her high-net-worth clients. We’ll also break down the major differences between ETFs and individual stocks so you can understand the benefits of this “best-of-breed” strategy.

Exchange-Traded Funds vs. Individual Stocks: What’s the Difference?

ETFs and stocks are two popular investment vehicles that you can buy and sell on the stock market. Both investments allow you to own shares in companies, but they operate in slightly different ways.

To understand their key differences, let’s briefly define each investment vehicle:

What are Exchange Traded Funds?

An ETF is a collection of stocks, bonds, currencies, commodities, or other securities that are bundled together and traded on an exchange. When you purchase a share of an ETF, you own a small portion of the entire portfolio of assets, which can include hundreds or even thousands of different securities.

ETFs typically track a specific index, sector, or asset class and aim to mirror the performance of a particular market segment or benchmark. For example, the S&P 500 ETF holds shares of the 500 largest U.S. companies, providing investors with broad exposure to the overall market.

The first US-listed ETF hit the market in 1993, and since then, the ETF market has experienced explosive growth. As of May 2024, over 12,000 ETFs are listed globally, with total assets under management surpassing $13 trillion.

Pros and Cons of ETFs

ETFs’ built-in diversification is one of their key advantages. They offer broad market exposure without the need to buy individual securities, reducing the risk that any one stock’s poor performance will affect your overall returns.

While ETFs’ diversification is a compelling benefit, it can also be a limitation. By investing in an ETF, you settle for the fact that some asset’s strong performance may be offset by weaker assets’ underperformance, limiting your overall returns.

For example, if your ETF tracks the S&P 500, your investment will only perform as well or as poorly as the index itself. This leaves little room for outsize gains.

What Are Individual Stocks?

A stock is a security that represents partial ownership in a company. When you purchase a stock, your investment’s performance is directly tied to that company’s success or failure. Thus, investing in individual stocks allows you to concentrate your money in companies you believe have the potential to outperform their peers.

While thorough research is essential for any investment, stocks generally require more in-depth due diligence than ETFs. To make an informed decision, you’ll need to evaluate the company’s:

• Financial statements, including its income statements, profit margins, balance sheets, and cash flow statements.
• Valuation metrics, such as its price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, price-to-sales (P/S) ratio, price-to-earnings growth (PEG) ratio, and dividend yield.
• Leadership and management, such as the company’s CEO, CFO, other key executives, board of directors, corporate governance practices, and company culture.
• Industry position, including the company’s competitive advantage, growth prospects, and public sentiment.
• Macroeconomic factors that may influence the company’s performance, such as inflation, interest rates, global supply chain disruptions, or upcoming regulatory changes.

Given the complexity of this analysis, many investors prefer to enlist the support of a financial advisor rather than selecting individual stocks on their own. A trusted financial advisor can help you identify companies that are most likely to outperform the broader market.

Pros and Cons of Individual Stocks

Individual stocks give you the opportunity to concentrate on companies you believe will outperform the market, offering the potential for higher returns. They also provide greater control and customization in portfolio construction, allowing you to tailor your investments to your specific preferences or goals.

However, unlike ETFs, individual stocks lack built-in diversification, which can make them more volatile. Without thorough research and constant monitoring, you could face significant losses if a stock underperforms.

Given the time, research, and expertise required to select individual stocks wisely, many investors—especially high-net-worth individuals—choose to rely on professional financial advisors to navigate this process.

5 Reasons Why Nicole Sennett Chooses Individual Stocks Over ETFs

Now that you have an overview of ETFs vs. individual stocks, let’s examine five reasons why Nicole Sennett prefers individual stocks for her high-net-worth clients.

#1 Higher Potential for Alpha

One of the most notable advantages of investing in individual stocks is the potential for alpha, which is the ability of an investment’s return to exceed that of a benchmark index. In other words, alpha represents the additional gains you can acquire from selecting the right stock, rather than relying on the market’s overall performance.

Since ETFs typically track indices like the S&P 500, their performance is designed to mirror the market. Thus, they can only match the performance of the index they track. In contrast, individual stocks have the capacity to outperform the market and generate alpha.

According to Nicole, “By selecting stocks with strong growth potential, a unique competitive edge, and a track record of exceptional management, I can often surpass the performance of a broad-based index for my clients.”

Read More: Nicole Sennett’s Values and Investment Process

#2 Control and Customization

The next reason why Nicole prefers individual stocks over ETFs is their enhanced control and customization. Hand-picking high-quality stocks allows Nicoelt to take a more active approach to portfolio construction, which can be essential for her clients with specific investment goals or values.

“When selecting stocks for my high-net-worth clients’ portfolios, I have complete control over which companies I include. If a client is passionate about a particular sector, such as technology, healthcare, or renewable energy, I can choose stocks that fit their preferences,” she said.

While you can select ETFs that focus on certain sectors, themes, or geographic regions, their potential for personalization is substantially more limited. After selecting an ETF, you must accept the fund manager’s chosen holdings.

#3 Tax Efficiency

High-net-worth individuals often face substantial tax bills due to their high income and extensive investment portfolios. As a result, they appreciate tax-efficient investment strategies that minimize their capital gains taxes and streamline their overall tax burden.

When it comes to tax efficiency, ETFs are at a disadvantage compared to individual stocks due to their capital gains distributions. Any time an ETF manager buys or sells securities within the fund, it can trigger taxable events for shareholders, even if they haven’t sold any of their own shares.

Fortunately, individual stocks don’t have this problem. “By holding my clients’ stocks for the long term, I can strategically manage when their capital gains taxes are triggered, minimizing their tax liabilities,” Nicole explained.

#4 More Control Over Risk Exposure

Every investment carries some level of risk. That’s why understanding your unique risk tolerance is one of the first steps a financial advisor will take before constructing your investment portfolio.

While ETFs offer broad market exposure, they also introduce a degree of unpredictability. Many ETFs hold a mix of companies, and some of these may not meet a client’s specific investment criteria. For example, a client may want to minimize exposure to highly volatile sectors like biotech or to industries that face frequent regulatory changes, such as tobacco or fossil fuels.

“Compared to ETFs, individual stocks allow me to control my client’s risk exposure with much greater precision,” explained Nicole. “I can avoid particular sectors, limit exposure to specific industries, or focus on companies with certain ethical values.”

#5 Ability to Take Advantage of Market Inefficiencies

Markets aren’t always perfectly efficient. Stock prices can deviate from their intrinsic value from time to time, presenting opportunities for investors to purchase undervalued stocks and profit as the market corrects itself.

Here are just a few examples of famously underpriced stocks that soared:

• Apple – In the early 2000s, Apple’s stock was undervalued due to skepticism about the company’s ability to reinvent itself after Steve Jobs’ return. After launching the iPod in 2001 and the iPhone in 2007, Apple’s stock skyrocketed by nearly 70,000% and 5,000%, respectively. Early investors who recognized Apple’s potential enjoyed enormous gains in the late 2000s and 2010s.
• Amazon – During its early years, many investors believed that Amazon was overvalued. After the dot-com crash in 2000, its stock price pummeled. However, Amazon continued expanding its e-commerce business and branched into cloud computing with Amazon Web Services (AWS), driving a substantial increase in its profits. Investors who held their Amazon shares were rewarded with massive gains.
• TSLA – For many years, Tesla was considered “overhyped” and “overvalued” by many investors. That’s because its stock traded at levels far higher than traditional auto manufacturers, despite repeated losses. While investors doubted Tesla’s ability to achieve profitability, the company continued to expand its production, advance its electric vehicle (EV) technology, and enter new markets, leading its stock price to explode in 2020. It’s now one of the most valuable companies in the world.

While ETFs may include stocks like these, they don’t allow investors to take full advantage of market inefficiencies. That’s why Nicole takes a more personalized approach. “In the pursuit of alpha, I actively monitor the market for stocks that may be mispriced,” said Nicole. “By investing in these stocks, I can deliver stronger returns for my high-net-worth clients.”

Read More: Nicole Sennett Discusses the Importance of Staying Invested: How the Best 5 Days of the Year Can Impact Your Portfolio

Employ a Best of Breed Strategy With Nicole Sennett

As you can see, investing in individual stocks presents many advantages. While ETFs are a strong passive investing strategy, they don’t offer the level of customization, alpha generation, and tax efficiency that individual stocks do.

“My goal is to deliver results that not only meet but exceed my clients’ expectations,” said Nicole. “By focusing on a best-of-breed strategy and selecting the highest-quality individual stocks, I can help my clients construct portfolios that align with their long-term goals and values, rather than settling for the broad market’s performance.”

Are you a high-net-worth individual looking to grow your wealth? Nicole Sennett can help. After learning about your goals and risk tolerance, she can develop a custom investment strategy that leverages the power of individual stocks to take your wealth to new heights. Contact Nicole Sennett today to schedule your consultation.

About Nicole Sennett

Nicole Sennett is an independent financial advisor with an impressive career spanning back to 2005. She specializes in helping pre-retirees, retirees, and high-net-worth individuals create retirement blueprints and robust wealth strategies.

Nicole holds the Chartered Retirement Planning Counselor (CRPC®) designation. She has also earned several accolades, including Forbes’ Top Women Wealth Advisor (2020) and Working Mother and Shook Research’s Top Wealth Advisor Moms.

As a part of Alden Investment Group, Nicole has access to a seasoned investment committee and a broad range of investment resources, allowing her to provide her clients with personalized, research-driven strategies that are designed to maximize returns.

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Investopedia. Alpha: Its Meaning in Investing, With Examples.
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Yahoo Finance. 2 Stocks That Turned $1,000 into $1 Million (or More). 
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CNBC. At one point, Amazon lost more than 90% of its value. But long-term investors still got rich.
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Vox. Why Tesla is overhyped — and overvalued.
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