Should I invest in ETFs or a Managed Fund?

Determining if one is right for you will depend on your financial goals, risk tolerance and how actively involved you want to be in managing your investments.

Read on to learn the differences between ETFs and managed funds.

What are the differences between ETFs and managed funds?

As the name suggests, an exchange-traded fund (ETF) is a fund that can be bought and sold on a stock exchange, similar to individual stocks. 

An unlisted managed fund is a fund that is not exchange traded, instead investors can invest or redeem by submitting applications to the fund issuer.

ETFs and managed funds are popular options for some investors to access easy diversification, and professional management for their portfolio.

Here are a few fundamental differences between the two vehicles:

Pros and cons of ETFs

Explore the pros and cons of exchange-traded funds:

Pros

1. Diversification: ETFs offer significant advantages to investors, starting with broad diversification. By holding a basket of underlying securities in a single investment, ETFs are able to spread risk and reduce volatility when compared to individual stocks. 
2. Cost-effective investment: Most ETFs are passively managed, which can lead to comparatively lower expense ratios and other fees than traditional actively managed funds, typically making ETFs a more cost-effective option for many investors.
3. Liquidity and flexibility: ETFs can generally be bought and sold throughout the day at market prices. This intraday liquidity is not offered by unlisted managed funds. 
4. Transparency and control: Passively managed ETFs provide transparency by typically publishing their holdings daily, which helps investors understand what they’re invested in.
5. Reinvestment through dividend reinvestment plans: ETFs can offer distribution reinvestment which allows for automatic compounding of returns by reinvesting distributions to purchase more shares.

Cons

1. Brokerage commissions and liquidity costs: Although ETFs are known for typically having lower management expenses, trading usually results in brokerage commissions, which may erode returns over time. Additionally, less liquid ETFs often experience wider bid-ask spreads, potentially increasing the costs associated with buying and selling. 
2. Volatility risk: In volatile market conditions, an ETF's trading price may deviate from its net asset value (NAV), potentially leading to inefficiencies in pricing and capital loss.
3. Lack of control over holdings: Another consideration for ETF investors is the limited control over the specific holdings within the fund. This lack of customisation can make it difficult for investors to align the ETF with precise investment strategies.
4. Potential underperformance: Some ETFs may experience tracking errors where they do not perfectly replicate the benchmark index, resulting in discrepancies between performance and expected returns.

Pros and cons of managed funds

Explore the pros and cons of managed funds:

Pros

1. Professional oversight: Actively managed funds have professional portfolio managers making investment decisions on behalf of their investors. This may be beneficial for those who do not have the time or expertise to research investments and actively manage their portfolios. While ETFs also benefit from professional oversight, the majority of funds tend to be passively managed with the goal of replicating an index as opposed to improving investment performance.

2. Diversification: Managed funds typically offer risk diversification by investing in a wide range of assets. As with ETFs this broad diversification generally reduces volatility compared to holding a more concentrated portfolio of individual stocks.

It is worth noting that returns vary based on the nature of the asset class. For instance, share-based managed funds have significant variability in annual returns. On the other hand, fixed income or money market funds come with more consistent returns and low capital volatility.

3. Simplified investing: By offering access to a diversified portfolio with a single investment, managed funds can be a way for investors to get exposure to a particular market without having to actively manage their investments. Managed funds also benefit from economies of scale, which can help lower transaction fees and other associated costs. 

4. Reinvestment and compound potential: Many managed funds offer distribution reinvestment options, allowing investors to reinvest gains and potentially compound their position over time.

Cons

1. Management fees: Higher management fees can diminish potential returns, especially during periods of underperformance. 

2. Additional costs: In some cases, there are additional costs that can seem small but have a large impact on your returns e.g. contribution fee, establishment fee, withdrawal fee and more.

3. Limited control over investment decisions: Managed fund investors relinquish control of specific investment decisions, which may not appeal to those who prefer a more hands-on approach to managing their investments.

4. Potential underperformance: Despite the expertise offered by portfolio managers, not all managed funds deliver consistent returns or outperform their relevant market benchmark.

Which is more suitable for me?

Choosing between investing in an ETF or managed fund will often come down to personal preference, financial circumstance and risk appetite. 

The convenience of being listed on a stock exchange makes it easier to purchase and sell a position. 

Managed funds could be suitable for investors seeking professional management, potential for outperformance and access to specialised investment strategies and assets not found with an exchange-traded fund. 

However, there is always the risk of capital loss with any investment. We recommend you consult a financial professional who can provide a more personalised insight into your circumstances.

Does Stake have a managed fund?

Yes, Stake Accumulate is a managed fund that invests in fixed income securities and other debt instruments, which may include exposure to illiquid instruments such as private credit. The Fund has the flexibility to make use of derivatives, Short selling, and leverage both for the purposes of hedging and increasing investment exposure.  The Fund aims to provide income distributions to investors equal to 2% p.a. above the RBA cash rate. 

Here are a few key features of Stake's managed fund:

• RBA cash rate +2%: The RBA cash rate is the official interest rate set by the Reserve Bank of Australia, which influences the interest rates banks offer borrowers and savers. For example, the current RBA cash rate is 3.85% meaning Stake Accumulate is currently targeting a 5.85% p.a. return.
• Automatic reinvestment: Earnings from the fund are reinvested by default, to potentially compound returns over time. This means the money you earn from your investment continues to work for you, although you can elect to receive cash distributions if you’d prefer. 
• Target consistent earnings: If the target return isn’t met, we’ve built features that aim to make up for the shortfall. This may provide stability in times of market volatility. The target return is not guaranteed and may not always be reached. Read the PDS for more information available on the Stake Accumulate website. 
• Easy access to your cash: Stake Accumulate investors can move their money in and out of the fund, with no entry or exit fees. 

👀 You can take a closer look at Stake Accumulate or by reading the PDS.

Things to consider before making an ETF or managed fund investment

Before making any investment, there are several key considerations to factor in. This is a non-exhaustive list, but a good place to begin your research. These include:

1. Assess your risk tolerance and financial goals
2. Your time horizon, or how long you’re thinking of investing in the position or market
3. Brokerage fees/management fees and potential tax factors

It is also worth considering the investment styles of different products and checking if they align with your strategy. Are they actively or passively managed? What are their strategies and asset allocations? 

Thinking about these in advance can help guide you toward investments that best suit your financial needs and long-term goals.

Of course, it’s recommended you speak to a financial professional or adviser prior to investing who can better understand your particular needs and circumstances. 

✅ Learn more: How to invest in a managed fund in Australia

ETFs or Managed Funds FAQs

Disclaimer

This information is prepared by Stakeshop Pty Ltd (ACN 610 105 505 [CAR 001241398]) (Stake), who is an authorised representative of Stakeshop AFSL Pty Ltd (AFSL 548196). The Stake Accumulate Fund ARSN 680 653 374 (Fund) is issued by K2 Asset Management Ltd (ABN 95 085 445 094 AFSL 244 393), a wholly owned subsidiary of K2 Asset Management Holdings Ltd (ABN 59 124 636 782).

This information is produced in good faith and does not constitute any representation or offer by K2 or Stake. It is subject to change without notice and is for general information purposes only and is not complete or definitive. K2 and Stake do not accept any responsibility and disclaim any liability whatsoever for loss caused to any party by reliance on the information contained in this article. This information is not financial advice. Any advice and information contained in this article is general only and has been prepared without taking into account any particular circumstances and needs of any party.

Read and consider the Fund Product Disclosure Statement (PDS) and Target Market Determination (TMD). Consider seeking independent financial advice on whether the Fund is appropriate for your needs, financial situation, and investment objectives. All investments carry risk. Past performance is not a reliable indicator of future performance. Offers to invest will only be made in the PDS, and this material is not intended to substitute the PDS. Both the PDS and TMD are available on the Stake website, or on request from K2.