Exchange Traded Funds or Stocks?

In a previous post, I had set up my Questrade account and decided that I was going to purchase the iShares Canadian Financial Sector Index Fund (XFN).

My funds are currently in transit from CIBC to Questrade and once the transfer is complete, I'll be making my purchase.

But after thinking about it and reading some of the comments particularly from the MyFindependence Day Blog, I've decided that for my situation it is better to purchase an individual stock. After taking a real close look at XFN, I realized (and it was pointed out to me) that the top four holdings represent 60% of the value of the fund. That's not a large number.

SAVING ON TRANSACTION COSTS

So, the question becomes, even with a low management expense ratio (MER) of .55% versus an MER of 2% with my old mutual fund, could I save my self some money by simply buying the stocks myself? Why pay any MER fee (admittedly one this reasonable) when most of the holdings are represented by only a few stocks?

I have to say in my case, I could probably buy just a couple of the stocks and pretty much replicate the same result. Granted, I wouldn't have the full effect of holding all the stocks in the ETF but with the level of holdings I have right now, would it really matter? I feel fairly confidant at my ability to research a few stocks and make the proper selection.

WHAT LEVEL OF HOLDINGS?

I have to admit, if my portfolio were worth hundreds of thousands of dollars I'd have no problem purchasing this ETF. With that much capital to protect, it would be a little more intimidating choosing a larger selection of stocks. I'd probably choose a few different ETF's from various sectors but sadly, I don't have that kind of money. :(

You have to really wonder how good that kind of diversification would be if you have a small portfolio (like I do).

Obviously, for beginning investors an ETF would be a great place to start, but I have actually traded some stocks before so I have some experience. I'm also doing this trading for the enjoyment AND as a learning process.

What do you think? Is there a level under which you think it's better to own stocks or ETF's? $10K? 25K? 50K? Or does it matter?

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