MANAGED FUNDS VS ETFS
From little things, big things grow. This golden nugget of truth is lesson number 1 in building passive income from your investments.
Managed Funds and Exchange Traded Funds (ETFs) are both nifty investments and here are 3 reasons why.
1) You don’t need to be rich to get started.
Relatively low-risk and low-cost, they tend to see better long-term returns than money in the bank. You can also start small with as little as $1000.
2) You won’t put your eggs all in one basket.
Instead of buying one share in a company, with a single share purchase in an ETF or Managed Fund you get the benefit of investing in many companies all at once.
Some of these companies might be too expensive to buy shares from directly so getting access to their dividends through a a single Managed Fund/ETF is a great perk.
The assets you invest in with an ETF or Managed Fund can be stocks, bonds, real estate, infrastructure, cash, commodities (like gold), or a combination.
Diversifying your portfolio is a smart move as it minimises the risk to your investment.
3) You don’t need to be a financial wiz kid to invest in Managed Funds and ETFs. You just need to take a little bit of time to get your head how they work.
Once you understand the differences between Managed Funds and ETFs you'll feel more confident in getting started.
What is a Managed Fund?
Managed Fund companies hold assets in a variety of companies. When you purchase a share in a managed fund company, you gain access to the value of these assets.
Managed Funds are actively managed. The asset managers in the managed fund company use your investment to buy/sell more shares in different companies.
You receive returns based on how well these shares perform in the market.
What is an Exchange Traded Fund?
An ETF is bought through a brokerage account and trades like a stock on the exchange market. Each ETF contains a basket of different assets.
ETFs tend to be passively managed and track the market index, e.g. the S&P ASX200 market index tracks the top 200 Australian companies.
They almost guarantee that your investment will follow the market trajectory.
What are the differences between ETFs and Managed Funds?
ETFs are more tax efficient and lower cost. They passively follow the market index and don’t have a person (a fund manager) actively trying to avoid market bumps, like you get with a Managed Fund.
Managed Funds are better for investing smaller amounts more frequently as they don’t incur brokerage costs, giving your money the chance to accumulate market gains more quickly than ETFs.
In the infographic below we outline the main similarities and differences between Managed Funds and ETFs.
