ETFs or shares: which is better for you?
When it comes to building wealth, sooner or later you’ll be faced with a crucial question: ETFs or individual shares? This choice is not just a question of returns; it also affects how much time, effort and risk you put into your investment.
In this article, you’ll learn about all the key differences between ETFs and individual shares, along with their respective pros and cons, so that you can make the best decision for your financial goals.
In brief:
- Shares are ownership stakes in a company that can potentially yield high returns, but also carry significant risks.
- ETFs (Exchange Traded Funds) track indices such as the MSCI World and offer lower risk through broad diversification.
- Index funds are particularly suitable for beginners and long-term investors.
- With the core-satellite strategy, you can combine ETFs and shares to get the best of both investment types.
Choosing between shares and ETFs is often a challenge for investors. Both investment vehicles offer unique advantages, but differ significantly in terms of their structure, risk and potential returns.
But which option is right for you? By the end of this article, you’ll know whether shares or ETFs are a better fit for you.
Investments always involve the risk of loss. The value of your investments
can go up or down. The forecast or past performance is no guarantee or
prediction of future results.
Do your own research or seek financial advice before making any invest-
ments. The WELCOME promotion is subject to Terms and Conditions. Gift
Shares are allocated randomly from a selection of eligible stocks, with high-
er-value shares awarded less frequently.
Advantages of shares
When you buy shares, you acquire a stake in a company and thus become a shareholder. This ownership status offers you numerous opportunities, many of which provide long-term benefits for investors.
Shares are not just an investment, but also a way to exert direct influence over companies you believe in. The main advantages of shares are:
- High potential returns: A key advantage of shares is the high potential returns they offer compared to other asset classes. Individual shares can see significant price rises in a short space of time. Companies in growth sectors such as technology, renewable energy or biotechnology, in particular, often offer impressive potential for gains.
For example: If you had bought Apple shares (ISIN: US0378331005) 10 years ago had you bought it, the value of your investment would have risen by 748.32%. However, such price gains also carry risks, as a poor investment can quickly lead to losses.
- Voting rights: Another argument in favour of shares is the voting rights that many companies grant their shareholders. As a shareholder, you can vote on important decisions at annual general meetings, such as the election of the board of directors or strategic direction. This form of participation makes shares attractive to investors who wish to play an active role in a company’s development.
- Flexibility in choice: Shares offer enormous flexibility when it comes to choosing the companies you want to invest in. You can specifically select companies that align with your personal beliefs and values. For example, many investors opt for sustainable companies or those that develop innovative technologies.
For example, if environmental protection is important to you, you could invest in shares of companies that specialise in green technologies. Alternatively, some companies offer high dividend yields, which can provide you with a passive income.
Disadvantages of shares
Although shares offer many advantages, they are not without their challenges. It is important to be aware of the potential drawbacks before investing in individual companies. Shares can carry significant risks, particularly for investors without extensive experience. The main disadvantages of shares are:
- High risk of loss: Arguably the most serious risk associated with shares is the possibility of a total loss. Individual companies can go bankrupt, whether due to poor financial results, poor management decisions or unexpected market events. Bankruptcy can occur particularly quickly in the case of small or highly specialised companies. Investors who put all their eggs in one basket run the risk of losing their entire investment.
Imagine you invest in an up-and-coming public limited company operating in the renewable energy sector. If the company fails to hold its own against the competition, or if the management makes poor decisions, it could go into administration. Your invested capital would then be lost.
Good to know:
Only invest money that you can afford to be without in the long term, and diversify your portfolio to minimise the risk of loss.
- Time commitment: Successful investment in shares requires extensive research. You need to engage in a thorough analysis of companies’ business models, financial indicators and future prospects. This ongoing market analysis not only takes a great deal of time, but also requires an understanding of complex economic relationships. Without this knowledge, you run the risk of making the wrong decisions.
- Those who do not wish to go to this trouble might benefit from passive alternatives, such as an ETF portfolio including, for example, a dividend ETF, which require less effort.
- Lack of diversification: Another drawback of shares is that they often offer limited diversification. Many retail investors invest in just a few companies, which increases the risk. If these companies come under pressure, the impact on your portfolio is often severe.
Whilst index funds invest in hundreds of shares worldwide, a portfolio of individual shares is often limited to just a few companies. This makes you more vulnerable to losses if a single sector or company performs poorly.
Advantages of ETFs
Index funds are one of the most flexible and efficient investment options for retail investors. They allow you to invest in a wide range of assets, such as shares, bonds or even commodities, using just a single product. The main advantages of exchange-traded funds are:
- Greater security through diversification: One of the biggest advantages of exchange-traded funds is their automatic diversification. An index-linked fund invests in numerous companies at the same time, which significantly reduces your risk. If individual companies perform poorly, these losses are offset by the profits of other companies.
- For example, with the best MSCI World ETF (ISIN: IE00B4L5Y983), you are investing in over 1,500 companies worldwide. If a single company or even an entire sector underperforms, the overall value of your portfolio remains more stable than it would be with individual shares.
- Low costs: Another advantage of index funds is their low costs. Whilst actively managed funds often charge management fees of between 1% and 2%, the total expense ratio (TER) of ETFs is usually between 0.1% and 0.3%. These low costs make them particularly attractive for your long-term ETF returns.
Good to know:
Choose ETFs with a low total expense ratio to get the most out of your investment.
- Easy to use: You can invest passively in ETFs without spending a lot of time analysing individual shares. Once you’ve bought an index fund, you hardly need to worry about managing it. The fund automatically tracks the underlying index. This not only saves you time, but also reduces stress, as you don’t have to worry about short-term market fluctuations.
- Suitable for inexperienced investors: An ETF for beginners makes it easy to start investing and build your wealth over the long term.
- Regular returns with minimal effort: another advantage of ETFs is the opportunity to generate passive income. This allows investors, for example, to build up an attractive return on their shares over the long term.
Disadvantages of ETFs
Although index funds offer a wide range of benefits, there are also specific risks associated with ETFs. It is important to understand these drawbacks before deciding to invest in this type of fund.
The main disadvantages of index funds are:
- No outperformance: One of the key drawbacks of index funds is their structure. ETFs track indices such as the MSCI World or the DAX. They aim to replicate the average market performance rather than outperform it. Whilst investors in individual shares aim to achieve higher returns than the market, an ETF is always tied to its underlying index.
Example: The Apple share mentioned earlier could yield a return of 20% in a year, whilst the corresponding NASDAQ ETF might only yield 10%. This means that, whilst index funds offer stability, you cannot expect them to outperform the market.
- Market risk: Although index-linked funds reduce risk through diversification, they remain vulnerable to general market downturns. During a downturn, all companies within an index lose value, which also affects the ETF. To minimise this risk, you can diversify your investments by investing in different sector indices, such as a property ETF. This allows you to spread your capital across multiple asset classes.
- No targeted investments: Another disadvantage of ETFs is their limited flexibility. As these securities track entire indices, you cannot invest specifically in individual companies that you consider particularly promising. If a company within the index performs poorly, it remains in the fund nonetheless. It is often unclear whether and when the index will exclude the share.
Good to know:
With individual shares, you can specifically invest in companies that share your values or pay particularly high dividends. With ETFs, on the other hand, you are tied to the weighting of the relevant index.
- Annual tax liability for accumulation funds: One often-overlooked disadvantage of ETFs is the so-called ‘advance lump-sum tax’. This tax is levied every year in Germany, even if you have not realised any gains. The advance lump-sum tax is based on a notional return calculated from the value of the ETF and a fixed base rate.
For example, suppose you hold a reinvestment fund worth several thousand euros. Even if you haven’t realised any gains in the year in question, you may still be liable for a tax bill of several hundred euros. This tax can reduce your net return and should be taken into account in your planning.
Now that the respective pros and cons have been outlined, the six key criteria are set out side by side. This allows you to see at a glance which type of security is best suited to you.
1. Investment horizon
ETFs are ideal for long-term investors who wish to invest for at least a decade. As they are broadly diversified and track the overall market, they benefit from long-term positive market trends. Short-term fluctuations are smoothed out over longer periods, which is why ETFs are particularly well-suited to retirement planning and wealth accumulation.
Shares, on the other hand, offer greater flexibility, as they can be used for both short-term and long-term investments. Those who invest in individual shares can select specific companies and benefit from rapid price rises. However, significant losses are also possible, which is why a deeper understanding of the market is required.
2. Diversification
A major advantage of ETFs is their automatic diversification. A single ETF can comprise hundreds or even thousands of companies from various sectors and regions, thereby minimising the risk associated with individual companies going bankrupt. By investing in a global ETF, you spread your capital across numerous markets, thereby reducing your risk.
When it comes to shares, diversification depends on the investor themselves. Anyone who invests in only a few companies is exposing themselves to a high level of concentration risk. Achieving broad diversification across different sectors requires a significant amount of capital and time to select the right companies. Those who do not diversify sufficiently risk heavy losses in the event of market turbulence.
3. Potential returns
ETFs generally track the market and generate an average annual return of 7 to 8% over the long term. As they track the overall market, they are not designed to outperform it. Whilst the return is solid, there is no opportunity to achieve above-average returns.
Between 2014 and 2023, the MSCI World ETF (in euros) generated an average annual return of 8.2%.
Shares, on the other hand, offer the chance to outperform the market. Those who invest early in successful companies can make huge profits. High returns are particularly possible in growth sectors such as technology or renewable energy. However, the risk is higher, as individual companies can also suffer heavy losses or even go bankrupt.
4. Risk
ETFs are considered a low-risk investment as their broad diversification helps to cushion losses incurred by individual companies. Investors who invest globally are less vulnerable to regional economic crises or the performance of individual sectors. Nevertheless, ETFs are not risk-free, as they can also lose value in bear markets.
With shares, the level of risk depends heavily on the choice of companies. Investing in sound, well-established companies can reduce the risk, but you are still at the mercy of the economic performance of individual firms. Speculative shares may offer high potential returns, but they can also lose value drastically. A total loss is not uncommon with shares.
5. Time required
ETFs are particularly suitable for investors who do not wish to spend much time managing their investments. Once set up, an ETF savings plan can be left unchanged for years. As ETFs automatically track the market, no active management is required.
Investing in shares, on the other hand, requires more time and specialist knowledge. Anyone investing in individual shares should regularly analyse company financials, keep track of market trends and adjust their strategy. Economic news and geopolitical events also have an impact on the stock market, which is why constant monitoring is essential.
6. Costs
ETFs have relatively low costs. Management fees (TER) are usually between 0.1% and 0.3% per year. As ETFs are passively managed, there are no high management fees. Trading costs are also low, as ETFs are usually purchased through savings plans.
There are no ongoing management fees for shares, but trading fees and spreads can eat into returns. Frequent traders pay more for transactions and may need to use paid analysis tools. Whilst long-term buy-and-hold investors can minimise these costs, trading in individual shares is generally still more expensive than trading in ETFs.
7. Right to have a say
ETFs do not offer any direct say in corporate matters, as investors only hold indirect stakes in the constituent companies. Decision-making power remains with the fund providers, who vote on behalf of the constituent shares. Consequently, ETF investors have no influence over corporate decisions or annual general meetings.
With shares, on the other hand, investors often have voting rights as shareholders in a company. Anyone who holds shares in a company can attend annual general meetings and vote on corporate strategies, dividends or board elections. This gives long-term investors greater control over their investment.
Investments always involve the risk of loss. The value of your investments
can go up or down. The forecast or past performance is no guarantee or
prediction of future results.
Do your own research or seek financial advice before making any invest-
ments. The WELCOME promotion is subject to Terms and Conditions. Gift
Shares are allocated randomly from a selection of eligible stocks, with high-
er-value shares awarded less frequently.
Comparison table: ETFs vs. shares
| Criterion | ETFs | Shares |
| Investment horizon | Long term (at least 10 years) | Flexible, with the potential for short-term gains |
| Diversification | Very widely spread | Depending on your individual choice |
| Opportunities for returns | An average of 7 to 8% per year | Potentially above-average returns are possible |
| Risk | Low due to broad diversification | High risk for individual companies |
| Time required | Minimal, as it is passively managed | High, as active analysis is required |
| Costs | Low administrative fees (0.1% to 0.3%) | No fixed fees, but high order costs are possible |
| Right to be consulted | No influence on business decisions | Voting rights at annual general meetings |
If you’re looking for a safe, long-term investment that requires very little effort, ETFs could be the right choice. If you want to invest actively, select specific companies and potentially achieve higher returns, you might find success with individual shares. However, you should also be aware of the potentially higher risk involved.
Good to know:
If you can’t decide between shares and ETFs, you can still invest in both at the same time.
The core-satellite strategy is a tried-and-tested method for combining the strengths of the best ETFs and individual shares. This approach allows you to build a portfolio that is both stable and opportunistic. The strategy is based on a clear allocation:
Core: Stability through ETFs
The core of your portfolio consists of funds that offer broad diversification and long-term stability. A common approach with the core-satellite strategy is to invest around 80% of your capital in broadly diversified index funds.
Advantages of the core component:
- Risk minimisation: ETFs spread your investment across hundreds of companies.
- Low costs: Thanks to the low total expense ratio, your returns remain high.
- Simplicity: ETFs require minimal management effort and are ideal for a passive ETF portfolio.
For example, by investing in the S&P 500 (ISIN: IE00B5BMR087), you are investing in the 500 largest listed US companies. Your portfolio benefits from the broad market performance in the US and remains stable, even if individual companies make losses.
Satellite: Opportunities with individual shares
You can invest the remaining 20% of your portfolio in individual shares to capitalise specifically on growth opportunities. This gives you the chance to select companies that you believe are particularly promising. Through these targeted investments, you can potentially achieve above-average returns. Alternatively, you can adjust the percentage allocation and create a 70/30 portfolio.
Advantages of the satellite component:
- Higher potential returns: Individual shares offer you the chance to outperform the market.
- Flexibility: You can capitalise on trends and innovative companies.
- Personalisation: Choose companies that align with your personal values.
For example, you might invest specifically in companies such as Tesla (ISIN: US88160R1014) to capitalise on the growing demand for electric vehicles. At the same time, Amazon (ISIN: US0231351067) could also be included in your satellite portfolio to benefit from the ongoing e-commerce boom.
Investments always involve the risk of loss. The value of your investments
can go up or down. The forecast or past performance is no guarantee or
prediction of future results.
Do your own research or seek financial advice before making any invest-
ments. The WELCOME promotion is subject to Terms and Conditions. Gift
Shares are allocated randomly from a selection of eligible stocks, with high-
er-value shares awarded less frequently.
Why a combination of shares or ETFs makes sense
Combining funds and individual shares gives you the best of both worlds:
- Stability: Your core portfolio remains secure thanks to broad diversification.
- Opportunities: Your satellite locations enable you to focus specifically on growth.
- Flexibility: You can easily adapt your portfolio to changes in the market.
The core-satellite strategy is an ideal way to combine stability with potential returns. By investing 80% of your capital in broadly diversified ETFs, you ensure long-term stability and minimise risk.
You can use the remaining 20% to invest specifically in individual shares, allowing you to capitalise on trends and innovative companies. This approach is ideal for beginners looking to build their first investment portfolio. Use a combination of individual shares and index funds to optimally balance your portfolio and invest successfully in the long term.
The choice between shares and ETFs depends on your goals, your knowledge and your risk profile.
ETFs are ideal for beginners looking for a stable, long-term investment strategy. With broad diversification, low costs and ease of use, they are perfect for building wealth.
Individual shares, on the other hand, offer the opportunity to target specific trends and growth sectors. However, they require more time and specialist knowledge.
With the core-satellite strategy, you can enjoy the best of both worlds. Invest 80% of your capital in funds to ensure stability, and allocate the remaining 20% to individual shares to capitalise on strong growth trends.
Whichever strategy you choose, think about how much risk you’re willing to take and what makes sense for you in the long term. That way, you can tailor your portfolio to suit your needs perfectly.
Frequently asked questions (FAQ) about ETFs or shares?
