When you’re looking to build an investment portfolio, it’s important to understand the differences between managed funds and exchange traded funds (ETFs).
Both of these investment strategies offer different advantages and drawbacks to investors in terms of liquidity, cost and potential for return.
To start, are you wondering ‘is an ETF a managed fund?’. To add to the potential confusion, the Australian Securities Exchange (ASX) considers ETFs to be a type of managed fund, with key differences.
In this blog post, we’ll explore the basics of managed funds and ETFs and provide a comparison of the two so that you can make an informed decision about the best investment strategy and tools to utilise.
1. Definition of Managed Funds and Exchange Traded Funds (ETFs)
Managed funds are an investment option that allows investors to pool their money with other investors, and have it managed by a professional fund manager.
The fund manager selects and trades investments on behalf of the fund, based on the fund’s stated investment objectives.
Exchange Traded Funds (ETFs) are a type of managed fund that are listed and traded on a stock exchange. ETFs are typically set up to track or replicate a particular index, such as the S&P/ASX 200.
Most ETFs are highly liquid, and provide investors with broad exposure to a particular asset class at a lower cost than a traditional managed fund.
2. Characteristics of Managed Funds and ETFs
Managed funds are either passively or actively managed by a professional fund manager.
The fund manager typically attempts to outperform the market by selecting stocks and other investments which they believe will provide better returns than the market. The fund manager monitors the fund and adjusts the investments in it according to their research and analysis.
ETFs are typically passively managed funds which track an index, such as the S&P 500, or a specific sector. ETFs are traded on stock exchanges, and can be bought and sold like individual stocks.
ETFs are designed to provide returns which are similar to the market, generally with lower costs and less risk when compared with managed funds.
Both ETFs and managed funds are established as a trust. The underlying assets are owned by the trustee on behalf of the unit holders. ETFs and managed funds are both subject to all the usual requirements for registered schemes under the Corporations Act 2001.
3. Benefits of Managed Funds and ETFs
Managed funds provide investors with a variety of benefits, including access to specialised investment management expertise, diversification of investments and access to a wide range of asset classes.
ETFs provide investors with the ability to access markets easily (as they are listed and highly transparent) and cost effectively (typically lower cost than actively managed funds) and provide simple asset class diversification via a single fund.
4. Risks associated with Managed Funds and ETFs
Both types of investments have their own inherent risks and it is important to understand and weigh up these risks before investing.
With managed funds, the risk of the fund manager’s investment decisions is the primary risk, as well as the risk of the underlying investments in the fund. So one strategy is to look for funds that have performed well over the long term. This means researching the performance of the fund over the past 5 to 10 years and comparing its returns and volatility versus its benchmark, as well as any changes within the team managing the fund. It’s also good to look at the fees associated with the fund and compare that with the average fees of similar funds and ETFs.
With ETFs the risk is primarily the risk of the underlying investments in the fund. We recommend looking for ETFs that track a well-understood and transparent index and to research the track record of the ETF.
You can find more information about risks associated with ETFs here.
5. Managed Fund vs ETF: Which is Better?
Managed funds and ETFs both offer diversified exposure to a portfolio of investments, but managed funds have more active management and require an investor to invest via a platform or directly with the fund manager. As a result, managed funds generally have higher fees and require a longer application process compared to ETFs.
ETFs also have increased transparency when it comes to the portfolio’s holdings and the costs. With an ETF, the investment manager provides transparency of the investments that make up the fund on their website (you can see Six Park’s portfolio holdings here).
With managed funds, the fund manager is not required to disclose the portfolio’s holdings, but may choose to do so.
The exit price of a managed fund is also less transparent, whereas ETF prices are live while the stock exchange is trading.
Ultimately, whether you decide to invest in a managed fund or an ETF (or both) depends on what structure is best suited to your individual investment goals and particular circumstances.
At Six Park, we utilise a range of carefully selected ETFs to deliver you a diversified investment portfolio. Six Park’s investment team spends significant time analysing the best ETFs in Australia and regularly reviews Australian ETF performance to ensure the ETFs we use to construct our clients’ investment portfolios are the best in the market.
Find out more about our selected exchange-traded funds (ETFs).
This article may contain general financial product information but should not be relied upon or construed as a recommendation of any financial product. This information has been prepared without taking into account your objectives, financial situation or needs.
For further details on our service please see our Financial Services Guide at http://www.sixpark.com.au. Past performance is not a reliable indicator of future performance.