Beating the index is hard, even for professionals. Of the nine active Australian share ETFs with a five-year record, none beat A200, a 0.04% index fund, over five years to 30 September 2026. Internationally, 2 of 15 beat VGS. Direct shares do have real advantages: no ongoing fee and full control over tax. Many investors use ETFs for the core and hold a few shares they know well alongside.
The case for each, in brief
- ETFs give you hundreds or thousands of companies in one trade, for a small yearly fee. You never need to pick a winner, and you will always own the winners.
- Direct shares have no management fee at all, let you choose exactly what you own, and let you decide when to sell and realise gains. The cost is your time, your judgement and less diversification.
The key question is whether a chosen handful of shares is likely to beat the whole market after costs. That is the test the data can help with.
How the professionals have done
Active ETFs are run by professional stock pickers with research teams. They make a useful benchmark for what picking shares can achieve. Here is every active Australian share ETF with a five-year record, against A200:
Five-year return: active Australian share ETFs vs A200
Over three years the picture is the same: none of the 12 active Australian share ETFs with a three-year record beat A200's 36.8%. Some of these funds aim for income or lower volatility rather than the highest return, and the sample is small. But the pattern matches decades of research. S&P's SPIVA scorecards have consistently found that most active Australian share funds trail the index over the long run, and the share that lag grows the longer you look.
If full-time professionals rarely beat the index, the bar for a part-time investor is high. It is not impossible, but it calls for an honest record of your own results against an index fund.
What an ETF already gives you
Many direct-share portfolios in Australia are built from the same blue chips: BHP, the big four banks, CSL, Wesfarmers. An ASX ETF already owns all of them in market weights, plus a few hundred more.
The blue chips are already in the index
Owning BHP, CBA and NAB directly alongside VAS mostly increases your weight in companies you already hold. Financials and materials are already 58% of VAS. A direct portfolio of ten Australian blue chips is often even more concentrated in banks and miners.
Costs: closer than you think
Direct shares have one clear advantage: no ongoing fee. Once you've paid brokerage, holding BHP for 20 years costs nothing. ETFs charge every year, but the cheapest charge very little.
Ongoing cost on a $100,000 portfolio
The real cost of direct shares is less visible: brokerage on many small trades, the time spent researching, and the risk of a large loss in one company. A $40 a year index fund is a hard benchmark to beat on cost alone.
Diversification beyond Australia
Direct share investors in Australia tend to buy Australian companies. That has been costly: the ASX is only about 2% of world markets, and over five years global shares have done far better.
Australian vs global shares over five years
Buying overseas shares directly is possible but fiddly: currency conversion, foreign tax forms and higher brokerage. A global ETF like VGS does it in one ASX trade. This is one of the strongest reasons even keen stock pickers use ETFs for their international slice. See Australian vs global shares.
Tax: a genuine edge for direct shares
- Franking credits flow through both ways. Australian-share ETFs pass on the franking from the companies they hold.
- Control over capital gains. With direct shares you decide when to sell, so you can time gains for a low-income year, or sell losers to offset winners. An ETF can pass on capital gains from its own trading, though broad index funds tend to do little of it.
- The 50% discount on gains held over 12 months applies to individuals either way.
For retirees in a tax-free super pension, the tax control matters less, because gains are taxed at 0% in retirement phase.
A sensible way to combine them
- Core in ETFs. A broad Australian fund such as A200 or VAS, plus a global fund such as VGS or BGBL, often 80% to 100% of the portfolio. See how to build your core.
- Satellite in shares you know. If you enjoy it and have real knowledge of a company or industry, a small slice in direct shares lets you act on it. See building a satellite portfolio.
- Check the overlap. Your direct shares are probably already in your ETF. The overlap calculator shows how much.
More on the professional side in active vs passive ETFs, or browse every active ETF and Australian shares ETF.
Common questions
Is it better to buy ETFs or individual shares?
For most investors the evidence favours ETFs for the core: none of the nine active Australian share ETFs with a five-year record beat the A200 index fund. Direct shares can suit a smaller slice for investors with time, knowledge and discipline.
Are ETFs cheaper than buying shares directly?
Direct shares have no ongoing fee, only brokerage. ETFs charge a yearly fee, but the cheapest are 0.03% to 0.07%, or $30 to $70 a year on $100,000, and one trade buys hundreds of companies.
Do ETFs pay franking credits like shares?
Yes. Australian-share ETFs pass on the franking credits attached to the dividends of the companies they hold.
Should I hold BHP and CBA if I own VAS?
You already own them through VAS: BHP is 11.2% and CBA 9.2% of the fund. Buying them directly as well increases your concentration in two companies.
Joshua Stega is a financial adviser with 20 years' experience and the founder of ETF Adviser. He built ReviewETF to make every Australian ETF easy to find and compare.
General information only. It does not take into account your objectives, financial situation or needs. Consider the PDS and TMD before investing. Past performance is not a reliable indicator of future performance. Data as at 30 September 2026.