Currencies, Stocks, ETFs: Comparing Asset Classes

Currencies, stocks, ETFs. Very often, when a trader is called upon to decide what to invest in, the choice falls on these asset classes. After all, the Forex, stock, and ETF markets enjoy a lot of visibility, despite the spread of cryptocurrencies (which is significant anyway). It is therefore worth making a comparison between the three asset classes, providing some coordinates about their dynamics and illustrating both the pros and cons. In this way, traders can gain orientation for decisions to be made as soon as possible.

Currencies, stocks, ETFs

Before listing the advantages and disadvantages, it is good to provide an overview of the three asset classes. On currencies, actually, there is little to say. In the sense that all those who show interest in this asset class have an idea (more or less clear) of the role of currencies in the world of investments. The currency market is called Forex. Currencies are traded in pairs, as the value of each is explicable only in relation to another. The most traded pair ever is the euro-dollar, which moves the equivalent of a few thousand billion euros (or dollars) every day. Even the stocks do not need much introduction. After all, we are talking about some of the most appreciated assets of all time, which in some way the collective imagination crowns as the recipients par excellence of any investment activity. Stocks are issued by issuing companies, listed on specific stock exchanges, grouped into indices in order to provide an overview of the strength of a sector or a geographical context. They can be traded in a speculative trading perspective, or held for a long time in order to receive dividends. Finally, the ETFs, which certainly represent the most mysterious asset class of the group. Well, ETFs are managed savings funds whose manager does not invest and does not speculate, but rather sells and buys with the sole purpose of replicating the performance of an underlying. In this way, the price fluctuations of this underlying are transformed into yield (or loss). It is possible to acquire ETF shares to obtain the returns resulting from this "passive management", but it is also possible to sell and trade them, a bit like one would do with stocks. Before proceeding with the description of the pros and cons of each asset class, it is good to make a clarification. We will talk about currencies, stocks and ETFs only in a direct trading perspective, i.e. trading of real assets. Therefore, we will exclude from the analysis CFDs and Futures, which are regulated by partially different dynamics.

Pros and cons of Forex

Forex, or the currency market, has come to the fore with ordinary people for at least a decade. It is very popular and frequented, but obviously has its pros and cons. Among the advantages stands out the extreme liquidity. Forex is probably the most liquid market in the world. To put it briefly, "a lot of money circulates". This implies a high probability that, even in forms of trading without market makers, the order will be filled. Even if one were to trade with market makers, the trader would still find himself sheltered from unfavorable spread policies. Another advantage concerns readability. Currencies are at the center of debate and analytical activity by many experts. Moreover, they are linked to some particularly stable market movers, which affect currency ratios in a somewhat "linear" manner. Finally, a tendency to rather balanced oscillation is noted. Currencies fluctuate, but generally do so within a range. Certainly, we are far from the volatility of certain stocks and "extreme" asset classes such as cryptocurrencies. As for the defects, a reduced variety of available assets is noted. Basically, we are talking about a few dozen currencies, some of which are decidedly exotic, therefore with low liquidity and difficult to read. Basically, those who operate in Forex do so with the usual dozen currencies. Another "con" of currency trading concerns the possibility that entities external to the exchanges may "manipulate" the market. The quotes are a must also because these are completely legitimate and even essential activities for the stability of the economic system. The reference is to the monetary policies of central banks, which have a profound impact on currency ratios. It is obvious: this impact adds unpredictability to the market, and can disorient or contradict traders' analyses.

Pros and cons of stocks

Similar and at the same time different discourse for stocks. Among the advantages we find again readability, although "fragmented". There is a great variety of stocks, and very often the market movers diverge from each other. However, market movers between real economy performance, the reference sector and the company itself certainly do not lack. As do the analysis and outlook activities of experts (unless one opts for niche stocks). Another advantage is the extreme variety. The stocks available are really many, and each offers different insights in terms of yield, volatility, manageability, etc. It should also be noted the possibility of earning both from dividends and from the usual trading activities. Among the defects, a certain emotionality that, at times, involves the stock market stands out. These moments for some act as a source of opportunity, but in the vast majority of cases they put traders in difficulty. Another flaw is a bit the other side of the "variety" coin, and consists of a rather structural difficulty in orienting oneself. The possibilities are simply too many and less experienced traders may suffer from it.

Pros and cons of ETFs

Different discourse, however, for ETFs, which represent an asset class with its own characteristics. An advantage certainly consists in clarity and transparency. Traditional management funds, in fact, are certainly subject to many rules, but are also susceptible to the manager's ability, who still retains a fair margin of discretion. The ETF manager, on the other hand, can only aim at replicating the performance of the underlying. In this way the investor knows exactly what he is getting into. It follows - and this is another advantage - that the criteria for choosing an ETF are not many. Certainly, they are fewer than for stocks. An ETF, for example, is good if it is "faithful". Likewise, it is good if it replicates a growing underlying. A defect of ETFs consists in costs. Let's be clear, the fees are far lower than those of an actively managed fund. However, they may be higher than the commissions and spreads applied by Forex or stock market intermediaries. Nothing to worry traders too much, though. Another defect consists in the reduced margin of discretion. Sure, ETFs can be traded, and thus become full-fledged assets. If, however, one proceeds with the "classic" mode of use, only the manager is responsible for one's share, moreover in a passive management perspective. In short, the margin of discretion is very small even for him. Finally, the difficulty of choosing the underlying should be noted. After all, we are talking about "guessing" future movements, increasing the chances of betting on the right horse. This is never easy, regardless of the reference market.

What to choose

So, which asset class should be preferred? As we have seen, the three alternatives have pros and cons. Actually, it is not possible to provide an answer valid for everyone. Choosing the reference asset class, and therefore the market in which to invest, is a matter that also and above all involves the value of compatibility. Some profiles are more suitable for one asset class rather than another. The advice, therefore, is to sift through one's characteristics, goals and investment methods, and only then relate them to what the various asset classes can offer. Another piece of advice is to diversify. Basically, you can diversify by staying in the same market. This appears relatively simple when operating in stocks, given the abundance of securities, but the other markets still offer acceptable opportunities in this regard. No one forbids you, however, to diversify between markets. It is certainly more complicated, but it could lead to better results. Obviously, to do this you will have to develop extensive skills and knowledge. One way to make up for the deficit of "mastery" of a market is to combine classical study with a long practice session. From this point of view, demo accounts are ideal. In fact, they simulate the trading activity in the real market, while avoiding any risk.

Currencies, Stocks, ETFs: Comparing Asset Classes