ETFs vs shares: how they compare

• ETFs and individual shares are both bought and sold on an exchange, and both can pay income and carry risk.
• The biggest difference is diversification: an ETF holds many investments in a single trade, while a share gives you exposure to just one company
• They also differ in how they're run and what they cost. An ETF is professionally managed and has ongoing charges, whereas with individual shares, investors do their own research and do not have ongoing fund charges.

Marketing Communication. The value of your investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

At first glance, exchange traded funds (ETFs) and shares can look similar, and they do have a lot in common. But they also differ in ways that matter. Understanding both can help investors compare how each one works.

What is an ETF?

An exchange traded fund (ETF) is a basket of investments that can be bought and sold in a single trade on a stock exchange. The holdings inside an ETF can be shares, bonds, currencies, commodities, or other assets.
Buying shares in an ETF gives you exposure to the fund's underlying investments. Each ETF also has a net asset value (NAV): the value of everything the fund holds, minus what it owes, divided by the number of shares. In plain terms, the NAV reflects what the fund's investments are worth per share.

What is a share?

A share is an investment that gives the holder part ownership of a company. Shares in listed companies are bought and sold on stock exchanges across Europe, including Deutsche Börse, the London Stock Exchange, and Euronext.

ETF vs shares: similarities

Transparency

Many ETFs publish their holdings regularly, often daily, so you can see what the fund owns. With an individual share, it's more straightforward: you own a stake in one company, so you always know exactly what you're holding.

Range of investment options

Both ETFs and shares may give you access to a wide range of markets and sectors. Whichever route you take, there's a broad choice of ETFs and individual companies to invest in.

Brokerage fee or commission

Because ETFs and shares are both bought and sold on an exchange, you'll usually pay a brokerage fee to trade either one. Some online brokers offer commission-free trading on certain shares and ETFs, but this varies by country, broker, and platform, and other costs can still apply, such as platform fees, taxes, and the gap between the buying and selling price (the spread).

Pricing and trading

Both ETFs and shares trade on an exchange during market hours, so their prices move through the day and reflect what buyers and sellers are currently willing to pay. There's one nuance with ETFs: the price you trade at can be slightly above or below the fund's NAV, the value of its underlying investments.

Dividends

If you own shares in a company, you may receive income in the form of dividends if the company pays out part of its profits. ETFs may pass on income too. Depending on the type of ETF, that income is either paid out to you (a distributing ETF) or reinvested inside the fund (an accumulating ETF). How much income you receive, how often, and how it's taxed all depend on the ETF, the country in which you invest, and your own circumstances.

ETFs vs shares: differences

Diversification

An ETF usually holds many investments at once, so a single trade can give you exposure to lots of different companies. An individual share gives you exposure to just one. That spread means an ETF may reduce single-company risk, the risk that comes from relying on the fortunes of one business. It doesn't remove risk altogether, though, and an ETF can still lose value.

Research and management

ETFs are professionally managed, but in different ways. Many are passive (also called index ETFs): they aim to track a market index, such as a broad global or European benchmark, rather than trying to beat it. Others are active: a manager chooses the investments in pursuit of a particular objective. With an individual share, there's no fund manager, so you do your own research and decide when to buy and sell.

Ongoing charges

An ETF's ongoing charge covers the fund's management fees and running costs, shown as a yearly percentage of the fund's value. An individual share doesn't have an ongoing charge like this, because there's no fund to run, though you'll still pay costs to buy and sell it. Whichever one you hold, consider the overall cost of ownership, including trading costs, any platform fees, and, for ETFs, ongoing charges.

Key points of comparison

A broadly diversified ETF can spread your money across many investments, markets, or asset classes in a single trade. That can reduce the impact of any one holding doing badly, though it doesn't prevent losses. An individual share gives you part ownership of one company. On its own, it offers no diversification, which can add to the overall risk in your portfolio. It's worth comparing ETFs, individual shares, and other investments on how they work, their risks, and their costs, and deciding what suits your own situation.