The key difference between ETF and managed fund is that ETF is an investment fund usually designed to track an index, a commodity or bonds where the value of the fund depends on the underlying investment whereas, in a managed fund, investors who share similar investment goals pool funds and the fund is managed by a fund manager. Investing in an ETF or a managed fund is subjected to its risks and benefits and these are relatively novel and advanced methods of investing compared to traditional investment options such as common equities and bonds.
CONTENTS
1. Overview and Key Difference
2. What is an ETF
3. What is a Managed Fund
4. Side by Side Comparison – ETF vs Managed Fund
5. Summary
What is ETF?
ETF (Exchange Traded Fund) is an investment fund usually designed to track an index, a commodity or bonds where the value of the fund depends on the underlying investment. The investors can purchase shares from the stock exchange. ETFs are open-ended funds where the size of the fund increases when more investors contribute money and the fund size shrink when investors withdraw money.
Shares in an ETF is similar to common shares and may trade at a premium or a discount to the underlying investment, however, this difference is often minimal where the ETF share price reflects the value of the investment fund. Investors receive dividends as the return for their investment and capital gains or losses will be applicable at the point of selling the shares.
Below are some examples of the widely traded ETF funds that tracks an index.
|
ETF |
Index |
|
Standard & Poor’s depositary receipt (SPDR) |
S&P 500 Index |
|
IMW |
Russell 2000 index |
|
QQQ |
Nasdaq 100 |
|
DIA |
Dow Jones Industrial Average |
Figure 01: S&P 500 Index
Typically, ETFs have a lower expense ratio compared to more managed funds and management fees are low as 0.07% compared to managed funds. Further, ETFs are highly liquid investments since they trade like common shares. However since the performance of ETF is linked to an index, it is directly influenced by the fluctuations in the index.
What is a Managed Fund?
A managed fund is a pool of funds invested by a number of investors who share similar investment goals. A professional fund manager is appointed to manage the fund and to invest the fund’s money on behalf of the investors according to expected investment goals. Investors can buy units of ownership in a managed fund which is similar to buying shares in a company. As the value of the fund’s investments increase or decrease, the unit price of the fund fluctuates accordingly. There are two main types of managed funds as per below.
Single Asset Funds
These funds invest in a single asset class; for example, fixed income, property or shares
Multi-asset or Diversified Funds
Multi-asset or diversified funds, invest across a range of asset classes and sectors. The investment strategy of the particular managed fund determines the mix of assets.
Figure 02: Types of managed funds
Managed funds can be a good investment as they offer diversification by giving investors the opportunity to invest in a wide range of securities where they can make regular investments. However, these are generally highly illiquid investments and high management fees are payable to the fund manager for managing the fund.
What is the difference between ETF and Managed Fund?
ETF vs Managed Fund |
|
| ETF is an investment fund usually designed to track an index, a commodity or bonds where the value of the fund depends on the underlying investment. | A managed fund is a pool of funds invested by a number of investors who share similar investment goals purchase criteria. |
| Acquisition Method of Shares | |
| Shares in ETF are purchased like common shares. | Shares in managed funds are purchased via a fund manager. |
| Risk | |
| EFTs is highly risky investments due to the dependency on an index. | Risk in managed funds varies from fund to fund. |
| Management Fees | |
| EFTs incur low management fees. | High management fees are payable in managed funds. |
Summary – ETF vs Managed Fund
The difference between ETF and managed funds exists with regard to a number of criteria such as the nature of risk, the way of acquiring shares and the amount of performance fees. The selection between these two options should be made according to the preference and risk appetite of the respective investors. In ETF, investors are more involved since this is similar to trading common shares whereas, in managed funds, the role of the investor is limited since the fund manager takes the decisions and actively manages the fund.
References:
1.”Stock ETF.” Investopedia. N.p., 29 Dec. 2010. Web. 12 Apr. 2017.
2.Australian Government Australian Securities & Investments Commission. “Managed funds | ASIC’s MoneySmart.” C=au;o=Australian Government;ou=Australian Government Australian Securities & Investments Commission. C=au;o=Australian Government;ou=Australian Government Australian Securities & Investments Commission, 08 Mar. 2017. Web. 12 Apr. 2017.
3.Michael Lannon. Back to Basics – Understanding Managed Funds. Tech. N.p.: n.p., n.d. Print.
4.Cherewyk, Peter. “Advantages and Disadvantages Of ETFs.” Investopedia. N.p., 20 Dec. 2016. Web. 12 Apr. 2017.
Image Courtesy:
1. “S and P 500 chart 1950 to 2016 with averages” By Overjive – Own work (CC BY-SA 4.0) via Commons Wikimedia