While both managed funds and ETFs are popular among investors looking to diversify their portfolios, they differ significantly in their management styles, accessibility, and fees. In this blog, we’ll explore the differences between ETFs and managed funds and offer insights to help you navigate your investment options.
Exploring the key differences between exchange traded funds (ETFs) and managed funds
Exchange-traded funds (ETFs) and managed funds (also known as mutual funds) are both made up of many different assets and offer diversification for investment portfolios.
Accessibility
ETFs are traded like shares and you can buy units through your broker or financial advisor. Once you have a brokerage account, you won’t have to fill out any more paperwork. Meanwhile, managed funds are usually purchased off-market and require application forms, which may be time-consuming to fill out.
Management style
One key difference between the two is that managed funds are typically actively managed, aiming to outperform a specific benchmark index. On the other hand, ETFs in Australia are generally passively managed, seeking to track an index like the ASX200 or the S&P500 or a specific commodity such as gold.
Expenses and fees
Managed funds generally charge higher fees than ETFs and they may also charge a performance fee if their performance exceeds a specific benchmark. This difference in fees is because ETFs are typically passively managed and don’t incur the fees associated with active management.
Transparency
One of the most commonly cited benefits of ETFs is their transparency. Compared to many actively managed funds, ETFs offer more transparency and information about their underlying holdings is easily accessible on their website. In comparison, managed funds aren’t required to disclose their portfolio and often only list their top 10 investments. This makes it more difficult to understand exactly what underlying assets you are investing in.
Pricing
Since orders to buy or sell ETF units are executed throughout the trading day at the current market price, pricing changes continuously. On the other hand, the price of a managed fund doesn’t change throughout the day. No matter what time of day you place your order, you’ll pay the same price as everyone else who placed their order that day.
Comparing investment approaches and strategies
ETFs offer you the flexibility to either invest in the market as a whole or in specific segments. You can invest in equity, commodity, index, or sector-specific ETFs, allowing you to diversify your portfolio without the need to pick individual shares.
Thanks to the wide variety of ETFs available on the Australian Securities Exchange (ASX), you’ll have plenty of options to choose one that aligns with your investment strategy, values and goals.
To help you narrow down your options, decide whether you want to invest in an Australian or International ETF and whether you’re looking for broad market exposure or exposure to different industries. Once you’ve determined what you’re looking for, you can compare the coverage and fees of your different options.
Managed funds are unlisted, which differentiates them from ETFs and Listed Investment Companies (LICs). While ETFs are usually passively managed, managed funds take an active approach.
They aim to beat the market rather than track an index, and the fund manager may use more risky strategies to do so. Managed funds require the expertise of a fund manager, traders, and analysts. This translates into significantly higher management fees compared to an ETF.
Both managed funds and ETFs have an open-ended structure, meaning that there’s no limit to the number of shares a fund can issue. As more investors buy into the fund, more shares are issued.
Many managed funds also require minimum investment amounts, which can range from anywhere between $5000 and $100,000 and beyond.
Diversifying your portfolio with ETFs and managed funds
Investing in ETFs or managed funds is an effective way to diversify your portfolio. When you invest in either managed funds or ETFs, you get access to a basket of shares or assets, which diversifies your portfolio and mitigates the risks of one investment underperforming.
Many ETFs and managed funds also offer exposure to international markets, which allows investors to diversify globally. This is especially beneficial, as some countries may experience economic growth while others may be experiencing challenges. However, it’s important to note that if you invest overseas, you’ll be subject to exchange rate risk. To reduce this risk, some ETFs are ‘currency hedged’ and aim to minimise the effect of currency fluctuations on your returns.
Tailored financial advice for your investments
For personalised advice on how to get the most out of your investments, book a free, no-obligation consultation with one of our financial experts today.
Rebecca is passionate about promoting the positive impact of quality financial advice on personal wellbeing. Read her full bio here.
