ETFs and Managed Funds, a little clarity

You can invest in diversified investments via an ETF (available on a platform or listed exchange), SMA or Managed Fund (both available on a platform).

How you access these investments depends on your wealth plan and structure.

Here we discuss ETFs and Managed Funds. An SMA has features that sit between these two, which we will discuss in a separate blog.

Our VAULT process will help you develop your wealth plan, and this will determine which investment option suits you.

What Are ETFs and Managed Funds?

  • An Exchange Traded Fund (ETF) is an investment fund that can be bought and sold on an exchange, such as the Australian Securities Exchange (ASX).
  • A managed fund pools money from multiple investors, which is then invested according to the fund’s investment strategy.
  • Index ETFs and index managed funds can both provide access to a portfolio designed to track a particular market or investment index.
  • In some cases, an ETF and managed fund may hold very similar underlying investments.

The right option will depend on your circumstances, investment strategy and how you prefer to invest.

ETFs and managed funds share several similarities.

  • Both can provide access to a diversified portfolio through a single investment.
  • They can invest across different asset classes, industries, market sectors and countries.
  • Both commonly use a trust structure, where investments are held on behalf of investors.
  • Investors may receive distributions from income and realized gains generated by the underlying investments.
  • Both are regulated investment structures and are subject to requirements applying to registered managed investment schemes.

One of the main differences is how you invest additional money.

  • Managed funds can make it easy to set up regular contributions or withdrawals, which can suit investors who want to invest smaller amounts regularly.
  • ETFs can generally be bought whenever the relevant exchange is open.
  • Depending on the platform used, buying or selling ETFs may involve brokerage or other transaction costs.

This means the most suitable structure can depend partly on how often and how much you intend to invest.

How Are They Priced?

  • ETF prices move throughout the trading day, and units are bought and sold at the available market price.
  • Traditional managed fund transactions are generally processed using a calculated unit price based on the fund’s net asset value (NAV), rather than being continuously traded throughout the day.

What About Transparency?

  • ETFs generally provide a high level of visibility over their underlying investments, with holdings information commonly available through the fund manager.
  • The level and frequency of portfolio disclosure for managed funds can vary depending on the fund and its structure.
  • Index managed funds can also provide a high level of transparency because their investments are generally linked to a specified index.

Trading and Flexibility

ETFs may provide greater trading flexibility for investors who are comfortable buying and selling investments through an exchange.

  • They can generally be traded during market hours.
  • Investors can use different order types, such as limit orders.
  • ETFs may also be available for use within certain margin lending strategies.
  • The market maker may be able to net off trades to save on transaction costs.

Managed funds generally don’t provide the same day-to-day trading flexibility, but their structure can make regular investing and withdrawals simpler.

Diversification

Diversification is one of the key reasons investors may use either structure.

Rather than purchasing individual investments one at a time, an ETF or managed fund can provide exposure to a range of investments through a single holding.

Depending on the fund, this could provide exposure to:

  1. Australian or international shares.
  2. Fixed interest.
  3. Property.
  4. Different industries or market sectors.
  5. A combination of different asset classes.

Diversification doesn’t remove investment risk, but it can help reduce your reliance on the performance of one individual investment.

Why Does It Matter?

The question isn’t necessarily whether ETFs or managed funds are better.

Both can play a useful role within an investment portfolio. The important part is understanding what you’re investing in, how it works and whether it suits your broader investment strategy.

Your decision may come down to:

  1. How regularly you want to invest.
  2. How much flexibility you want when buying and selling.
  3. The fees and transaction costs involved.
  4. The investments you want exposure to.
  5. How the investment fits within your overall portfolio and financial goals.

Develop your wealth plan and determine which investment option suits you.

Our starting point is to understand whether your current investments are working towards your goals.

Talk to us. We will help you make informed investment decisions with greater clarity and no confusion.

Important Notice:

The information contained in this article is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate for your circumstances before acting on it and seek advice from a qualified professional.

Personal financial advice can only be provided after considering your individual circumstances and providing the appropriate disclosure documentation. VJC Wealth accepts no liability to any party for any loss arising from reliance on this information unless it has been provided as part of a formal advice engagement.