What's the difference between managed funds and ETFs? And which product type is right for you? Read more to learn the key features of both investment products and how you can start investing.
If you're an investor on the Australian stock market, or are considering becoming one, there's a good chance you've heard of ETFs.
ETFs are exchange traded funds, and they remain the fastest-growing investment segment on global stock markets.
But there's also another very large investment segment that continues to experience strong growth in Australia, and there's a very good chance you're already part of it.
Separate from the stock market, large amounts of money continues to flow into managed funds.
That includes money coming directly from investors, and superannuation money that's invested into managed funds on behalf of millions of working and retired Australians by super funds.
What are the difference between ETFs and managed funds?
In reality, ETFs and managed funds are very similar types of products.
In fact, in many cases, an ETF traded on the stock market will largely be identical to an unlisted version of the same product that's available to investors as a managed fund.
It's often the case that a managed fund will be created first, and then an ETF version of the product will be launched sometime later to provide easy access to investors wanting to buy via the stock market.
ETFs and managed funds are both managed by professional fund managers. They choose and monitor the holdings the funds invest in.
Both ETFs and managed funds have in-built diversification. They pool together money from many people and invest across hundreds, and sometimes thousands, of individual shares, bonds, and other investment securities.
For example, instead of buying lots of separate shares, you can invest in one ETF or managed fund that owns shares across Australia's 300 biggest companies.
You can also use the pooled buying power of ETFs and managed funds to access asset types that are normally out of reach to individuals, such as large commercial office buildings, shopping centres, infrastructure assets, and government bond issues.
And, in the same way as you can invest into ETFs and managed funds that own Australian assets, you can just as easily invest in products with investments in other countries and wider global regions.
You also can buy into diversified ETFs or managed funds that invest across multiple asset types, which allow you to increase or reduce your exposure to different assets such as shares based on your risk tolerance.
Which product type is right for me?
Choosing whether to invest in ETFs or an equivalent managed fund generally comes down to your personal preference around how you'd like to invest.
It doesn't have to be a one way or the other decision either. You may decide to invest some of your money into ETFs and some into managed funds.
ETFs are listed securities, just like shares, and are bought and sold in real-time during stock market trading hours.
There are usually one-off trading fees (stock brokerage) associated with buying and selling, which will vary based on the investment platform you use. The Vanguard Personal Investor platform charges no brokerage on buying ETFs and a low $9 flat brokerage rate for selling ETFs, irrespective of the transaction value.
The market price of an ETF will change throughout the day, based on factors such as investor demand as well as other broader factors that may be affecting markets on any given day.
As such, ETFs are subject to market volatility in the same way as shares and other market-listed securities.
But an advantage of being listed is that buyers and sellers have the choice of trading at the live market price or setting an order price limit.
An order price limit allows you to choose either the highest price you're willing to pay to complete a buy transaction, or the lowest price you're willing to accept to complete a sell transaction.
Managed funds are unlisted, but they can also easily be bought and sold on trading platforms such as Vanguard Personal Investor.
Unlike ETFs however, the price of a managed fund doesn't change in real-time throughout the day.
Its price is calculated after the stock market closes each day based on its revised net asset value, and is then set for the next trading period.
So, regardless of what time of day you place your order, you'll get the same managed fund price as everyone else who buys and sells on that day. This removes intraday price volatility.
Orders for Vanguard managed fund units will be processed on the same business day if received by 1pm AET. Orders received after 1pm AET will be processed the next business day.
Managed funds can provide a regular source of income. Some funds offer monthly, quarterly, or six-monthly income distributions.
Investors can choose to take distributions in cash payments or reinvest them back into the fund. Reinvesting your income distributions can compound your returns giving you potential for higher growth.
Regardless of whether you choose to invest via ETFs or managed funds, or both, there are various factors you should always consider before making any type of investment. These include:
- your tolerance for investment risk and your return expectations;
- your investment objectives and personal circumstances;
- the length of time you intend to invest (your time horizon);
- investment fees, management costs and tax; and
- the investment styles of different products.
Vanguard's investment products page has detailed information on all of its ETFs and managed funds. This includes key facts about each fund's size, its investment objective, its suitability, benefits, risks, and fees.
You can also see what assets each fund holds, its investment performance over time, and the level of historical distributions from the fund.
Using low-cost, diversified ETFs and managed funds to build your investment portfolio will help give you the best chance of investment success over the long term.