Individual Investors

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ETFs vs managed funds: What's the difference?

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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