ETF or stock-picking? The honest answer for the DIY investor
2026-06-22 · By Lubin Danilo, founder of Lubin Investment
The S&P 500 ETF remains the best choice for the majority of investors: near-zero fees, instant diversification, no stock selection effort needed. A maximum quality filter may improve risk-adjusted returns, but without any guarantee of outperformance. The two approaches are complementary, not opposed.
- S&P 500 ETFs beat 80 to 90% of active managers over ten years — a well-documented statistical reality.
- The S&P 500 holds 500 stocks of very mixed quality: Apple sits alongside low-quality cyclicals.
- Filtering only for maximum-quality-score companies is not traditional active management — it is a fundamental quality filter.
- Over five years, several maximum-quality companies have outperformed the S&P 500, but past performance is no guarantee.
- ETF fees: 0.03 to 0.20%/year. Stock-picking: time, research, and concentration risk.
The conventional wisdom: ETFs almost always win
According to S&P Global's SPIVA studies, between 80 and 90% of actively managed equity funds underperform their benchmark index over ten years. The iShares S&P 500 ETF (IVV) or Vanguard's (VOO) gives you exposure to the 500 largest US companies for 0.03% in annual fees.
The quality-filter argument: we're not doing the same thing
When I talk about a portfolio made up exclusively of maximum-quality-score companies, I am not doing active management in the classical sense. I am not making macroeconomic bets. I am not trying to time the market. I am applying a strict fundamental filter: only companies that simultaneously satisfy all ten quality criteria enter the portfolio.
The problem with the S&P 500: 500 stocks, very mixed quality
The S&P 500 is cap-weighted. Apple, Microsoft, Nvidia each represent more than 5% of the index. But the index also holds hundreds of cyclical, indebted companies with thin margins. By buying an S&P 500 ETF, you inevitably buy those low-quality companies.
Have maximum-quality companies outperformed the S&P 500?
Over the past five years, several companies with maximum quality scores did outperform the index: Qualys (QLYS), Kinsale Capital (KNSL), Mastercard (MA), PayPal (PYPL), Moody's Corporation (MCO). But the honest answer is: there is no guarantee. Fundamental quality improves the probability of outperformance — it does not guarantee it.
| Criterion | S&P 500 ETF | Maximum quality stock-picking |
|---|---|---|
| Annual fees | 0.03 – 0.20% | Time + brokerage (high implicit cost) |
| Diversification | 500 companies | 20 – 60 companies (concentration) |
| Effort required | None | High (analysis, monitoring, discipline) |
| Average position quality | Variable (mixed) | High (strict filter) |
| Risk of underperformance | Low vs index | Real if poorly executed |
| Suitable for | All investors | Methodical, patient investors |
The right mental framework: complementarity, not opposition
My personal position: these two approaches are not opposed. A sensible portfolio could combine a core S&P 500 ETF allocation (60 to 70% of the portfolio) with a concentrated stock-picking sleeve focused on maximum-quality companies at reasonable valuations (30 to 40%).
The hidden costs of stock-picking
If you value your time at $50 per hour and spend 100 hours per year on your portfolio, that is $5,000 in implicit cost. On a $50,000 portfolio, that is 10% per year. A 0.07% ETF on the same portfolio costs $35 per year.
My conclusion: ETF first, quality filter if you want to go deeper
If you are starting out or short on time — the S&P 500 ETF is the best answer. If you want to go further and apply a disciplined fundamental quality method — the maximum quality filter is a serious starting point.
FAQ
Do S&P 500 ETFs really beat 80 to 90% of active managers?
Yes, this is a statistical reality documented by S&P Global's SPIVA studies over twenty years of data.
Is filtering only for maximum-quality companies really different from active management?
Yes, on one key point: intent. Classical active management seeks to anticipate which companies will outperform. The quality filter seeks to eliminate structurally low-quality companies.
Why does the S&P 500 hold low-quality companies?
Because the index is built on market capitalisation and liquidity criteria, not fundamental quality.
Which companies have a maximum quality score in your screener?
Companies that have reached a maximum quality score include Qualys (QLYS), Kinsale Capital (KNSL), Mastercard (MA), PayPal (PYPL), and Moody's Corporation (MCO).
Can you combine ETFs and stock-picking in the same portfolio?
Absolutely, and it is probably the most sensible approach for a serious DIY investor.
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About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).