The treatment algorithms for displaced fractures of the femoral neck need to be improved if we are to reduce the need for secondary surgery. We have studied 102 patients of mean age 80 years, with an acute displaced fracture of the femoral neck. They were randomly placed into two groups, treated either by internal fixation (IF) with two cannulated screws or total hip replacement (THR). None showed severe cognitive dysfunction, all were able to walk independently, and all lived in their own home. They were reviewed at four, 12 and 24 months after surgery. Outcome measurements included hip complications, revision surgery, hip function according to Charnley and the health-related quality of life (HRQoL) according to EuroQol (EQ-5D). The failure rate after 24 months was higher in the IF group than in the THR group with regard to hip complications (36% and 4%, respectively; p < 0.001), and the number of revision procedures (42% and 4%, p < 0.001). Hip function was significantly better in the THR group at all follow-up reviews regarding pain (p < 0.005), movement (p < 0.05 except at 4 months) and walking (p < 0.05). The reduction in HRQoL (EQ-5D index score) was also significantly lower in the THR group than in the IF group, comparing the pre-fracture situation with that at all follow-up reviews (p < 0.05). The results of our study strongly suggest that THR provides a better outcome than IF for elderly, relatively healthy, lucid patients with a displaced fracture of the femoral neck.