Exchange Traded Funds versus Managed Funds

Choosing the best fund for your investments can be difficult. Both ETFs and managed funds have numerous benefits, and one shouldn’t discard the other without thoughtful consideration.

According to the Australian Securities Exchange (ASX), ETFs are managed funds, but traditional managed funds are sometimes less transparent and potentially a more expensive approach to investing. Both, however, are open-ended funds that co-mingle assets and seek to achieve a stated investment objective.

The similarities

Both ETFs and managed funds can track an index or be actively managed by professional investors. These five points define the similarities between these funds:

1. Legal ownership: Legally, both ETFs and managed funds are trust structures. The units of the funds are combined and owned by unitholders. As an investor, you purchase units in the funds.
2. Diversification: Both fund types can be a blend of underlying shares or other assets like bonds or cash (or indeed multi-asset portfolios); a pool that defines the fundamental premise of the fund.
3. Open-ended: Both are open-ended funds. As demand to purchase units increases, more units become available for purchase and vice versa when units are sold.
4. Objective: Both funds exist to achieve a specific stated objective for the investors. This may be to track the performance of an underlying index, target outperformance of a stated index or achieve another outcome (e.g. income or absolute performance level, say 4%p.a.).
5. Active or Passive Management: In both the ETF segment and the managed fund segment you can find both active and passive management. Depending on your investment philosophy, it might be an option to consider both as part of building your investment portfolio.

The differences

To determine which is the best fund for your situation, you must assess how much value you place on the additional services inherent to managed funds and whether the costs of those services are justifiable.

In the comparison of ETFs and managed funds, numerous financial analysts compare index ETFs to actively managed funds and point to substantial cost savings with ETFs. This comparison, however, isn’t level since much of the difference of cost lies in the active versus index management, not the difference between the funds. And even amongst the passively managed ETF universe of funds, fees can vary considerably. So it is worth being on the lookout for this. To more fairly compare the two, an investor should focus on net of fees return on the investment choice, not specifically the fees of the funds in isolation.

In an ETF, the investment manager provides transparency of the investments that make up the fund on their website. In managed funds, it is not required to disclose the portfolio’s holdings but many choose to disclose their top ten positions.

Managed funds are good for investors who wish to incrementally add savings to investment because regular contributions are permitted, though accumulating a significant amount before contribution may often minimise buy/sell costs.

Like shares, ETFs are bought and sold at the current share market price by investors through their brokerage account. Prices are live while the stock exchange is trading. Indeed, many people cite the ease of access and liquidity of purchasing and selling ETFs as one of their greatest attributes when compared to managed funds.

To purchase a managed fund, the investor must invest directly with the fund manager or via a platform through a long-winded application form. However, managed fund investors do not know the exit price until the following day because pricing is set on a day of trade plus one (T+1) schedule. Sales are executed at the end-of-day price or on the net asset value of the assets. In some cases, investors must wait several days to receive the sale proceeds.

Which is best for you?

Managed funds and EFTs share many similarities, including ownership, diversification, the fact they are both open-ended, and seek to achieve an investment objective, but they also have differences you should consider to determine which is best for your investment. When comparing costs, it’s important to compare the attributes of the funds and their net of fees returns, not just the fees in isolation.

One drawback to managed funds when compared to ETFs is the lower level of visibility into the fund’s portfolio holdings. Another is not knowing the exit price since this is calculated on a T+1 schedule. If your goal is to achieve a stated investment outcome, either of these open-ended funds, with commingled assets, present an opportunity to investors.

Compare Exchange Traded Funds

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