ETF or stock-picking? The honest answer for the DIY investor
2026-06-22 · By Lubin Danilo, founder of Lubin Investment
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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.
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 à 0.20% | Time + brokerage (high implicit cost) |
| Diversification | 500 companies | 20 à 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.
Related reading
- Almost perfect stocks: what the missing criterion changes
- The one quality criterion mega-cap stocks miss most
- Does a perfect quality score protect you from the market?
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About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).