What an individual share is
Buying a share makes you a part-owner of one company. Your return depends on that company's fortunes: its profits, its decisions, its industry and how the market values it. You may receive dividends if the company pays them, and as a shareholder you can usually vote at company meetings.
What an ETF is
An ETF is a fund that trades on a stock exchange like a share. One unit gives you a small slice of everything the fund holds. Many ETFs track an index — for example the largest 200 Australian companies, or thousands of companies worldwide — while others focus on a sector, a theme, bonds or commodities. A fund manager runs the ETF and charges an annual fee for doing so.
Side-by-side
| Individual shares | ETFs | |
|---|---|---|
| What you own | One company | A basket of holdings |
| Diversification | Only what you build yourself | Built in, varies by fund |
| Ongoing fees | None charged by the share | Annual management fee inside the fund |
| Brokerage | Per trade, per company | Per trade, one trade buys the basket |
| Control | You choose every company | The index or manager decides |
| Research required | Higher | Lower for broad funds |
| Income | Dividends from that company | Distributions combining many sources |
Diversification
A single broad-market ETF can spread your money across hundreds or thousands of companies in one purchase. Building similar breadth from individual shares would take many purchases, more money and ongoing upkeep. That said, not every ETF is broad: a single-sector or thematic ETF can be quite concentrated. See What Diversification Actually Means.
Fees
Individual shares have no ongoing management fee, though you pay brokerage each time you buy or sell. ETFs charge a management fee, expressed as a percentage of your investment each year and deducted within the fund, so you never see a bill. Broad index ETFs often have low fees; specialised or actively managed funds usually cost more.
Fees compound. On a $50,000 holding, the difference between a 0.1% and a 0.7% annual fee is $300 a year — and that gap grows as the holding grows. Brokerage also matters: building a portfolio of 20 individual companies means at least 20 trades.
Concentration and control
Owning individual shares gives you complete control. You decide which companies to hold, how much of each, and when to sell, and you can avoid companies you do not want to own. The flip side is concentration: if one company makes up a large part of your portfolio, its bad news is your bad news.
An index ETF hands those decisions to a rule. You own the index as it is, including companies you might not have chosen. Market-weighted indices also give the largest companies the largest share, so even a broad ETF can lean heavily on a few names.
Dividends and distributions
Companies may pay dividends, and in Australia these can carry franking credits. ETFs collect the dividends, interest and sometimes realised gains from their holdings and pass them on as distributions, usually quarterly or half-yearly. Distribution statements can be more complex for tax purposes because they combine several types of income. Your accountant or the fund's annual tax statement is the authority here.
Effort and behaviour
Owning individual companies invites more attention: results announcements, news, price moves. Some people enjoy this; others find it pulls them towards frequent trading. A broad ETF asks for less attention, which some investors find makes it easier to stick with a long-term plan. This is about temperament as much as numbers.
Combining both
Many investors hold one or more broad ETFs as a base and a smaller number of individual shares on top. If you do this, check for overlap: a large individual holding in a company that is also a top holding of your ETF increases your exposure to it more than you might realise.
Questions worth asking yourself
- How much time do I want to spend researching individual companies?
- Do I want control over each holding, or am I comfortable with an index deciding?
- What would I pay in fees and brokerage under each approach at my investment size?
- How concentrated would my portfolio become?
These are questions for you, and potentially a licensed adviser, to answer. Neither route is better in general.
Tracking both in Compndr
Compndr tracks ETFs and individual shares side by side, shows each as a share of your total, and calculates cost basis and returns the same way for both. It does not look inside ETFs, so overlap between a fund and an individual holding is something to check using the issuer's published holdings. For the bigger picture, read Asset Allocation Explained.