do you think you would be better off buying a basket of stocks? ETFs (the broader index ones) are decent in my opinion. Others (to be un-named) should have never been created and are terrible for the markets.
You really think that the management fees of something like SPY or XLF XLE are going to be greater than buying a basket of the SnP500 or fins or energy? and if that answer is yes then how are you going to pick stocks that give you diversity and broad exposure while limiting yourself from the downside of news and single-name events?
The fees are a drawback, no question. And agreed, news events can and will pull down at times what I've bought so far. I'll be drilling down into industry groups to find the stocks I'll need to bring the diversification I'm looking for.
I don't think that ETFs are inefficient for portfolio modeling - I just think they are only one tool (of many) in the shed. Do you agree that taking on single names lowers your diversification (increases concentration risk) and also increases your speculation risk? Buying an ETF (like SPY) is just a broad-market diversified allocation. If you were trying to decide between purchasing the stock basket (equally weighted to SPY/S&P 500) you will find that 10 times out of 10 purchasing SPY will be lower cost than purchasing the stock basket. I guess what I'm trying to say is that its two totally different things - buying an ETF is a broad, diversified investment/trade/play whereas buying single-name stocks is a lot different - its more of a speculative trade or a specific bet on a stock or micro-sector than it is a diversified portfolio allocation. If you have names that you don't like in an ETF you could always buy the ETF and sell the stocks - or buy the ETF and also buy the stocks you like or want to be over-weigh in. They are two different strategies. If you want to replicate an ETF on your own you will lose every time when it comes to fees & expenses. If your strategy is not trying to replicate an ETF then you can't really compare the two.