A beginner's guide to ETFs versus managed funds
It is a tough decision choosing between an exchange traded fund (ETF) or a managed fund. While there are plenty of similarities between the two investment vehicles - particularly if they track an index - you need to understand that there are some significant differences that could sway your mind.
Here is what ETFs and managed funds have in common:
Broad exposure to the market
Both can provide diversified exposure through one investment to different sharemarkets as well as asset classes, industries, sectors and regions. Active managed funds use a strategy or style of investing that may not give you a broad exposure to the market and rely on the fund manager's ability to perform.
Both are legally known as trusts with the underlying assets owned by the trustee on behalf of unit holders. As unit holders you receive dividends (after fees) and any capital gains after any capital losses.
ETFs and managed funds are regulated and must meet the requirements of the Corporations Act. Trusts are typically held by a third-party custodian rather than the product issuer.
Both are typically an open-ended investment, which means they are not limited by a fixed number of units. They both regularly create and redeem units depending on supply and demand, making them liquid investments.
Here are the differences:
ETFs are typically more transparent than active managed funds. You can see the underlying investments readily on the investment manager's website while an active investment manager doesn't disclose their full investments apart from their top 10 holdings at a point in time because it isn't required to.
Adding new money
If you want to drip-feed savings into an investment, it is best to go with a managed fund because you can make regular contributions. However, with ETFs it is probably best to build up a substantial lump of money to invest as you have to pay brokerage (a fixed amount) with every transaction.
Buying and selling
ETFs are bought and sold like shares so you need a sharemarket account and a broker. Online brokers are plentiful and they do offer low rates.
A managed fund is bought from the fund manager or an intermediary such as a fund manager or a platform.
You can buy and sell ETFs throughout the trading day at the current sharemarket price. You can follow the prices of ETFs live when the ASX is trading. You can sell immediately.
You can use share trading strategies such as stop- loss orders. You can also use margin loans and borrow money to invest.
Managed fund investors don't know their exit price until the next day as pricing is set on a T+1 (day of trade plus one) basis and a sale is either executed at the end-of-the-day price or on the net asset value of the assets. You may have to wait several days to receive your money from the sale.