Are blue-chip stocks or ASX ETFs a better investment?

Here at the Motley Fool we endorse long-term investing. 

History tells us that markets like the S&P/ASX 200 Index (ASX: XJO) and S&P 500 Index (SP: .INX) can bring annualised returns between 7-12%. 

Many savvy investors fail to beat these markets through trading individual stocks. 

To gain access to these indexes, there are many ASX ETFs that track these domestic and international markets. 

However investors may also lean towards blue-chip stocks for long term investments. 

These blue-chip stocks represent financial stability, long-term growth, and a strong track record. 

So which is a better investment?

Let's look at the performance of some of the most popular ASX ETFs compared to blue-chip companies over the last 5 years. 

ASX ETFs

For investors looking to track the ASX or S&P, there are a few options: 

• BetaShares Australia 200 ETF (ASX: A200) – Tracks the ASX 200. 
• Vanguard Australian Shares Index ETF (ASX: VAS) – Tracks the largest 300 companies listed on the ASX.
• iShares S&P 500 ETF (ASX: IVV) – Tracks the S&P 500 Index. 

These are some of the largest ASX ETFs by assets under management – or in other words, have attracted the most investor money.

Investors may choose these funds for diversified exposure to the largest companies in Australia or the US. 

But how have they performed?

Over the past 5 years: 

• BetaShares Australia 200 ETF (ASX: A200) has risen 45.11%. 
• Vanguard Australian Shares Index ETF (ASX: VAS) rose 41.59%
• iShares S&P 500 ETF (ASX: IVV) rose 95.34%

The IVV ETF is heavily weighted to high-growth U.S. tech companies that have benefited from cloud computing, AI (especially since 2022), E-commerce and digital transformation. 

By contrast, the ASX 200 (A200/VAS) is dominated by banks and mining/energy companies that are more value-oriented, cyclical, and less growth-driven. 

In summary, The U.S. market rode a wave of tech-fuelled growth that the Australian market simply didn't have exposure to.

Blue-chip stocks 

If we go back five years and look at the performance of some of the largest companies by market cap here in Australia and in the US, you will see the risk/reward that is at play when it comes to investing in individual stocks rather than diversified ETFs. 

The largest company in Australia by market cap is Commonwealth Bank of Australia (ASX: CBA). 

Over the last five years it has skyrocketed 151.32%, vastly outpacing the ASX 200. 

Investors who chose this over an ETF 5 years ago would be ecstatic with their decision. 

However not every blue-chip stock has had the same performance. 

For example, CSL Ltd (ASX: CSL), another blue-chip company (third largest by market cap) has fallen more than 9% in the last five years. 

This illustrates the risk you take in choosing individual stocks, even trusted ones such as CSL. 

The same can be said for the US.

In the US, Alphabet (NASDAQ: GOOGL) has enjoyed a gain of 143% over the last 5 years. 

Meanwhile, Intel Corp (NASDAQ: INTC) – another S&P 500 company – has fallen 62%. 

Foolish takeaway

The choice between individual shares vs ASX ETFs will come down to risk appetite. The payoff can be larger by choosing a blue-chip holding, while simultaneously opening yourself up to a loss.

A diversified portfolio of ASX ETFs and individual stocks you have confidence in could be a happy middle ground.