ETFs vs Managed funds
A managed fund (also known as mutual fund) is a fund that pools your money and money from other investors to buy assets. An ETF (Exchange-Traded Fund) is a fund that can be bought on a stock exchange. Although there are similarities between these two types of funds, there are some key differences to consider.
Management Fees
Because it costs money for fund management companies to maintain a fund, they charge a Management Expense Ratio (MER). You don’t directly pay this fee when you invest in the fund, but it gets deducted from the annual return of the fund. E.g. A fund made a gross return of 10%, but with a MER of 0.10%, the fund made a net return of 9.90%.
ETFs typically cost the same or are cheaper than managed funds. Some examples are listed in the table below:
| Fund names | ETFs | Managed funds |
|---|---|---|
| Vanguard Australian Shares | 0.07% | 0.16% |
| Vanguard International Shares | 0.18% | 0.18% |
| Vanguard Australian Government Bond | 0.20% | 0.24% |
Trading costs
For ETFs, because they are bought on the stock exchange (hence the name Exchange-Traded Funds), they can be bought or sold throughout the trading day. To be able to buy or sell, you generally need to pay a brokerage fee of <$10 per trade. There is also a bid/ask spread, an indirect cost where you may pay a premium or a discount on a fund’s price.
For managed funds, buy and sell trades are all processed at the end of the trading day. There typically isn’t a brokerage fee to buy and sell, but there may be an ongoing admin fee if you’re using a service that offers a range of managed funds. Managed funds can also have a buy/sell spread.
Tax efficiency
ETFs tend to be more tax-efficient than managed funds because of how the fund works behind the scenes. In the figure below, Horstmeyer (2023) compared the tax efficiency of ETFs vs managed funds domiciled in the US and found the difference to be around 0.03% to 0.33%.
Fractional investing
Managed funds can be fractionally invested, meaning that you won’t have any leftover money when buying. On the other hand, the majority of brokers do not offer fractional investing with ETFs, causing a small annoyance of having leftover cash after a buy order.
Autoinvesting
This used to be a feature exclusive to managed funds, where you could automatically invest at a specified amount and frequency, but now there are some brokers that offer autoinvesting with ETFs.
Initial trade amount
The initial amount for an ETF generally needs to be at least $500, but future buys for that ETF can be any amount. The initial amount for managed funds can vary depending on the service you use to buy the funds. The minimum typically ranges from $0 to $25,000.
Coverage
There are a variety of investment objectives and strategies that an ETF or managed fund can offer. There are some objectives and strategies that are only in ETF form and others that are only in managed fund form. But for the purpose of creating a total market portfolio, there is very little difference between ETFs and managed funds.
Availability and portability
ETFs are available to be bought and sold at any broker that trades on the Australian Securities Exchange (ASX), and the funds can easily be transferred to a different broker by filling out a form.
Although some managed funds may have the option to be bought on the ASX, the majority of managed funds can only be bought through a financial service, and some funds can be exclusive to a financial service. They could also be bought directly with the fund management company, but this is aimed at institutional investors with typically a $25,000 or higher initial trade amount.