Individual Investors

ETFs vs managed funds: What's the difference?

Below we share with you a breakdown of the differences between costs, dividends, and functionality of an exchange traded fund versus a managed fund.

Costs


Exchange Traded Funds

Managed Funds

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Management Fees

ETFs typically have significantly lower management fees than managed funds. The business model of ETF providers is lower fees and then hitting higher scale. As ETFs are passive, they also require fewer analysts and researchers, the benefits of which are also usually passed on as lower fees.

Managed funds have significantly higher fees than ETFs, in some instances more than 10x as high. With many managed funds, fees do not end with the high management fees either. They can also charge an additional layer of "performance fees" which drives the costs up even higher for investors.

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Brokerage Fees

ETFs are traded on the exchange. This means brokers charge fees when buying and selling ETFs. Exact brokerage fees can differ quite widely between brokers. Online brokers such as SelfWealth are helping to drive brokerage costs down.

Managed funds do not require investors to pay brokerage fees.

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Entry/Exit Costs (Spreads)

ETFs are typically cheaper and less time-intensive to buy and sell than managed funds. This is because ETFs are supported by specialist investment banks called "market makers". These market makers - Jane Street, JP Morgan and Susquehanna are examples - work with ETF providers (such as ETF Securities) and exchanges to help get enter/exit costs, or spreads, down for investors.

ETFs are also typically less time-intensive to enter and exit as well. This is because in today's age of online share trading, ETFs can be bought and sold with the click of a button on an investors’ brokerage account.

Managed funds entry/exit costs are almost always higher than ETFs--both in terms of money and time. When investors buy into a managed fund, they enter into a transaction with the fund. The fund provider then takes an investors' cash and uses it to buy assets. And in return, gives investors units in their fund.

In this model, there are no specialised market makers, who are crucial for getting ETF trading costs down, involved. And as such, managed funds rely on more expensive in-house trading capacities. Additionally, there can also be a time burden when entering and exiting managed funds. For investors who are not using a wrap platform, there is usually a large amount of paperwork involved in setting up.

Dividends


Exchange Traded Funds

Managed Funds

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Dividend Reinvestment

ETFs easily allow for dividend reinvestment. Investors simply login to the share registry website (i.e. Computershare) and click on the dividend reinvestment button.

Dividend reinvestment for managed funds can be simple if they are bought on a wrap platform. However, if investors are going directly to the fund manager, there can be a paperwork burden involved in opting for dividend reinvestment.

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Franking Credits

No difference.

No difference.

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Size of Dividends

ETFs can have larger dividends than managed funds. This is because ETF fees are lower. Lower fees mean that more money is returned to investors in the form of dividends and share price growth.

Managed funds can have lower dividends than ETFs due to their higher fees. Higher fees mean that less money is returned to investors in the form of dividends and share price growth.

Functionality


Exchange Traded Funds

Managed Funds

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Intraday Pricing

ETFs are traded on exchange like shares throughout the trading day, meaning they allow a certain amount of flexibility between the ASX trading hours of 10am - 4pm. Throughout the day, ETF prices reflect the value of the securities they hold. As ETFs often hold many securities, their prices typically fluctuate more than the individual shares or bonds they hold.

Index funds can only be bought or sold at the end of the day close of trading, where they are priced at NAV based on the closing prices of the assets they hold.

This means they cannot be used for tactical trading like ETFs.

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Investment Minimum

ETFs do not have minimums. Investors can buy and sell as little as one ETF.

Managed funds often come with minimums, regularly above $10,000. In many instances above $25,000.

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Transparency

ETFs are fully transparent. ETF providers publish their holdings on their websites every day. This allows investors to check holdings of the fund daily.

Managed funds are usually opaque. They hide their holdings and do not allow investors to check holdings of the fund daily.

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Pricing Dislocations

Some ETFs with illiquid holdings - particularly bond and credit ETFs - can suffer from pricing dislocations in times of extreme volatility. These dislocations have historically been short lived.

As managed funds do not trade throughout the day, they do not suffer from pricing dislocations.

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Gating

As ETFs trade on the exchange throughout the day, they do not suffer from "gating", where the fund manager stops investors from entering and exiting.

Managed funds can suffer from gating in times of heightened volatility. This is where a fund manager prevents investors from entering or exiting.

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Regular Contribution

ETFs allow investors to "top up" and steadily increase (or decrease) the amount of an ETF that they own. However, doing so incurs brokerage costs in each instance and can therefore be more expensive if done too frequently.

Managed funds can be cheaper and easier to make regular top ups towards. This is because they do not have brokerage costs and some fund managers allow investors to set frequent direct debits.

Summary


Exchange Traded Funds

Managed Funds

Costs

Management Fees

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Brokerage Fees

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Enter/Exit Costs (Spreads)

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Dividends

Dividend Reinvestment

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Franking Credits

-

-

Size of Dividend

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Functionality

Intraday Pricing

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Investment Minimums

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Transparency

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Pricing Dislocation

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Gating

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Regular Contributions

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