1/17/2013
Usually retail investor pays significant brokerage fees to trade, while some ETF charges quite modest fees. I compared both fees (see the table below) with simple assumptions - ETF can be traded for free (valid for some funds in some brokerages), annual increase of stock or ETF price is 10%, no taxes on capital gains and dividends, initial ETF fees is 0.05% from investment value while flat brokerage fees are equal 0.2% for initial purchase. Last two numbers are real, for example, Vanguard's fees is 0.05% for VOO and Scottrade charges flat 7$ for a trade (I assume $3,500 investment, so it is 0.2%. If you're lucky and got ten-bagger you pay 0.02% when you sell it).
| Year | ETF Fees /Annual | ETF Fees /Cumulative | Capital Gains | Broker Fees/1way | Broker Fees/Round trip |
| 1 | 0.05% | 0.05% | 1.000 | 0.20% | 0.40% |
| 2 | 0.055% | 0.11% | 1.100 | 0.18% | 0.38% |
| 3 | 0.061% | 0.17% | 1.210 | 0.17% | 0.37% |
| 4 | 0.067% | 0.23% | 1.331 | 0.15% | 0.35% |
| 5 | 0.073% | 0.31% | 1.464 | 0.14% | 0.34% |
| 6 | 0.081% | 0.39% | 1.611 | 0.12% | 0.32% |
| 7 | 0.089% | 0.47% | 1.772 | 0.11% | 0.31% |
| 8 | 0.097% | 0.57% | 1.949 | 0.10% | 0.30% |
| 9 | 0.107% | 0.68% | 2.144 | 0.09% | 0.29% |
| 10 | 0.118% | 0.80% | 2.358 | 0.08% | 0.28% |
| 11 | 0.130% | 0.93% | 2.594 | 0.08% | 0.28% |
| 12 | 0.143% | 1.07% | 2.853 | 0.07% | 0.27% |
| 13 | 0.157% | 1.23% | 3.138 | 0.06% | 0.26% |
| 14 | 0.173% | 1.40% | 3.452 | 0.06% | 0.26% |
| 15 | 0.190% | 1.59% | 3.797 | 0.05% | 0.25% |
| 16 | 0.209% | 1.80% | 4.177 | 0.05% | 0.25% |
| 17 | 0.230% | 2.03% | 4.595 | 0.04% | 0.24% |
| 18 | 0.253% | 2.28% | 5.054 | 0.04% | 0.24% |
| 19 | 0.278% | 2.56% | 5.560 | 0.04% | 0.24% |
| 20 | 0.306% | 2.86% | 6.116 | 0.03% | 0.23% |
As anybody can see ETF fees are smaller than brokerage fees during first 5 years and after it brokerage fees for round trip are smaller when cumulative ETF fees. Therefore a long-term retail investor can "beat" even cheap ETF if (s)he hold stock long enough.
For more rigorous but a bit outdated study see
[1] Direct vs. Indirect Diversification
Keith V. Smith, John C. Schreiner
Financial Analysts Journal, Vol. 26, No. 5 (Sep. - Oct., 1970), pp. 33-38