Once you have decided you are ready to invest, your next question might be whether to invest in an exchange-traded fund or an unlisted managed fund.
Once you have decided you are ready to invest and have settled on the right asset allocation to suit your objectives, your next question might be whether to invest in an exchange-traded fund (ETF) or an unlisted managed fund.
The two products have a lot in common. If you were to imagine them as a Venn diagram, the ETF circle would share a large section with the managed fund circle. For example both index managed funds and ETFs share the common traits of diversification (providing investors with access to a broad market or sector) and transparency of holdings (knowing what you are investing in), and liquidity with both vehicles sharing a common open-ended ownership structure.
But there are some crucial differences to consider before you select one over the other. Let's start with some definitions. A managed fund pools money from many investors to invest in securities such as shares, bonds or other assets. Managed funds are overseen by investment professionals. Profits, losses and costs are shared by all investors. Managed funds allow individuals to achieve diversification, usually at a lower cost, more efficiently than if they assembled their own portfolios of individual securities.
The same is true for ETFs, but unlike a managed fund, an ETF trades on an exchange such as the ASX, just as a company's shares do. This can be seen as an advantage by investors who prefer to have some control over the price at which they buy or sell. ETF prices change by the minute, so investors get the price available at the time they place their orders unless they specify otherwise (using limit orders for example).
In contrast, managed funds are priced once a day at the end of the day, so if you buy or sell shares in a managed fund, you get the same price as everyone else who bought or sold the fund that day.
To buy an ETF, you will need to open a brokerage account or have a financial planner access the ETF you want for you. Both of these methods will likely involve fees. Because you pay each time you trade an ETF, investors who make regular contributions to a fund may be better off in a managed fund than in an ETF. However many ETFs can be accessed at a lower price per annum than managed funds.
Managed funds typically require an investor to invest a minimum amount, which can be in the region of $2000 - $5000 for a retail fund. . For ETFs on the other hand, the minimum investment amount is $500, so you generally don't need as much money to get started with an ETF. As Vanguard has pointed out in the past, this means you could create a simple, reasonably diversified portfolio for $1,000 by putting $500 in a share ETF and $500 in a bond ETF.
Most ETFs are index funds, which track a market index such as the ASX 300. ETFs that are actively managed — that is, they have managers picking individual shares to try to outperform the market instead of tracking an index — are just starting to become available.
As an investor, your most important decisions are identifying financial goals and then allocating assets in a low-cost, diversified portfolio aimed at reaching those goals. Once you make those choices, analyse how you typically invest.
ETFs may make more sense for people who are willing to set up, or already have, a brokerage account and want to be able to trade at a specific price and who don't make regular contributions. Managed funds may be a better option for those who don't want a brokerage account and prefer to make regular contributions to their investment fund through dollar-cost averaging or some other method.