ETFs vs Managed Funds: Which Suits Your Investment Style?
When Australians start investing beyond their super, two of the most common vehicles they encounter are ETFs (Exchange-Traded Funds) and managed funds. Both offer diversification, professional management, and exposure to different markets — but the way they operate, and the type of investor they suit, can be very different.
Understanding those differences is essential before you decide where to invest your next dollar.
What Are Managed Funds?
A managed fund pools money from multiple investors, which a professional fund manager uses to buy a portfolio of shares, bonds, property, or other assets. Each investor owns units in the fund, and the manager makes all buying and selling decisions on their behalf.
How Managed Funds Work:
Access: You invest directly through the fund provider, financial adviser, or investment platform (not via the ASX)
Pricing: The fund's unit price is calculated and updated once per day, typically at the end of each business day
Minimum investment: Can range from $1,000 to $25,000 depending on the fund and whether you're accessing retail or wholesale units
Transactions: You may need to complete application forms and withdrawal requests through the fund manager, adviser, or platform
Advantages of Managed Funds:
Access to professional management and specialist strategies (e.g., active stock selection, ESG focus, global bonds, alternative assets)
Automatic reinvestment of distributions if you choose
Regular investment plans available through many platforms without brokerage on each transaction
Suitable for long-term investors who prefer a "set-and-forget" approach
Access to strategies not available in ETF format (such as certain boutique managers or niche asset classes)
Drawbacks of Managed Funds:
Typically higher management fees due to active management (though passive index managed funds are also available)
Limited transparency — you can't always see every holding in real time; portfolios are typically disclosed quarterly or semi-annually
Less liquidity — you can only buy or sell at end-of-day prices, and some funds have notice periods for redemptions
Application/redemption process can take several days to complete
What Are ETFs?
An ETF (Exchange-Traded Fund) is similar in that it pools investor money into a diversified portfolio — but it trades on the ASX like a share. Most ETFs are passively managed, meaning they track an index such as the S&P/ASX 200 or S&P 500 rather than trying to outperform it.
However, actively managed ETFs (sometimes called Exchange Quoted Managed Funds or EQMFs) are also available and growing in popularity in Australia.
How ETFs Work:
Access: You buy or sell ETF units through your stockbroker or trading platform at market prices during ASX trading hours
Pricing: Prices fluctuate throughout the day in real-time, just like shares
Minimum investment: As little as the price of one unit (often a few hundred dollars) plus brokerage
Holding: ETFs can be held in personal accounts, SMSFs, wrap platforms, or super funds
Advantages of ETFs:
Low fees — average ETF fees are around 0.47% per year, roughly half the 0.93% average for managed funds, with some passive ETFs charging as little as 0.04% per annum
Instant diversification — one ETF can hold hundreds or thousands of companies
Liquidity and transparency — prices visible in real-time during trading hours, with daily portfolio disclosure
Easy to start — often accessible with just a few hundred dollars via online brokerage platforms
Tax efficiency — ETFs typically generate fewer taxable events for investors compared to managed funds
Flexibility — can be bought and sold any time during market hours
Drawbacks of ETFs:
Passive funds don't attempt to outperform the market — they aim to match it
Brokerage fees apply with each trade (typically $5-$20), which can add up for small regular investments
Market volatility affects daily pricing, which can trigger emotional decision-making
Spread costs — the difference between buy and sell prices (though typically small for liquid ETFs)
Less personal service — no direct relationship with a fund manager
Active vs Passive Management
It's important to note that both ETFs and managed funds can be either actively or passively managed:
Passive management: The fund tracks an index and aims to match its returns. Most ETFs follow this approach, as do some managed funds (often called "index funds")
Active management: The fund manager selects investments with the goal of outperforming a benchmark. This applies to most traditional managed funds, but also to a growing number of active ETFs
Active ETFs (EQMFs) are ETFs with fund managers who actively make investment decisions, typically aiming to beat a benchmark rather than track it. As a result, they usually have higher fees than passive ETFs.
Cost Comparison
Management Fees
ETFs:
Average ~0.47% p.a.
Passive ETFs: 0.04% - 0.15% p.a.
Active ETFs: 0.30% - 1.00% p.a.
Managed Funds:
Average ~0.93% p.a.
Index funds: 0.15% - 0.40% p.a.
Active funds: 0.80% - 2.00%+ p.a. (some charge performance fees on top)
Minimum Investment
ETFs:
From $500–$1,000 (price of units plus brokerage)
Managed Funds:
Often $1,000–$25,000 (retail)
$25,000+ (wholesale)
Trading Costs
ETFs:
Brokerage per trade ($5–$20 typically)
Plus bid-ask spread
Managed Funds:
Often nil for additional investments within the same fund
Some funds charge entry/exit fees
Trading Frequency
ETFs:
Real-time via ASX during market hours
Managed Funds:
End-of-day via fund manager or platform
Tax Efficiency
ETFs:
Generally more tax-efficient
Capital gains triggered only when you sell
Managed Funds:
Annual distributions may include capital gains passed through from fund activity
Transparency
ETFs:
Daily portfolio disclosure
Real-time pricing
Managed Funds:
Holdings typically disclosed quarterly
Daily unit price
The Long-Term Impact of Fees
A $10,000 investment over 40 years in a low-fee ETF (0.04% p.a.) versus a higher-fee managed fund (0.93% p.a.) could result in a difference of approximately $25,900, or 59% more, assuming the same underlying return.
This demonstrates why 38% of ETF investors rank management fees as their top consideration, even above performance (36%).
However, it's important to remember that fees must be considered alongside returns. A managed fund charging 1.2% that consistently outperforms by 2% per year may deliver better outcomes than a 0.10% ETF tracking an index.
Tax Considerations
ETFs:
Capital gains tax applies when you sell units (based on your holding period and marginal tax rate)
Distributions (dividends, interest, capital gains) are taxed in the year received
Generally more tax-efficient because the fund structure means less internal trading
Franking credits flow through to investors
Managed Funds:
Distributions (including any capital gains realized by the fund manager) are taxed annually, even if you haven't sold your units
More frequent trading by active managers can result in higher capital gains distributions
Franking credits also flow through to investors
Some platforms offer tax loss harvesting strategies
Both structures provide annual tax statements showing income and capital gains to include in your tax return.
Which Option Suits You?
Choosing between an ETF and a managed fund comes down to control, cost, and conviction.
You May Prefer ETFs If You:
Want low-cost, diversified exposure to markets
Prefer transparency and real-time pricing
Are comfortable managing trades yourself or via an adviser platform
Make lump-sum investments rather than regular small contributions
Prioritize tax efficiency and lower ongoing costs
Value flexibility and liquidity
You May Prefer Managed Funds If You:
Want access to actively managed or specialized strategies not available as ETFs
Value the structure of regular investment plans without brokerage on each contribution
Are investing larger sums or prefer a hands-off, long-term approach
Seek exposure to boutique fund managers or niche asset classes
Prefer the simplicity of automatic reinvestment and regular reporting
Are comfortable with less frequent pricing and slightly higher fees for specialised expertise
A Hybrid Approach
Many Australians use a mix of both strategies:
ETFs as a low-cost "core" for broad market exposure (e.g., Australian shares, international shares, bonds)
Managed funds as "satellites" for specialized themes, active management, or access to unique strategies
This approach combines the cost-efficiency of passive ETFs with the potential outperformance and diversification benefits of actively managed funds.
What About Managed Funds on the ASX?
Some managed fund providers (like Vanguard, Magellan, and others) offer their strategies in both unlisted managed fund format and listed ETF format.
Example: Vanguard's Australian Shares Index strategy is available as the VAS ETF (0.10% fee) or as a traditional managed fund (0.16% fee). Both track the same index, but VAS trades instantly on the ASX while the managed fund prices once a day.
In these cases, the ETF version typically offers lower fees and more flexibility, while the managed fund version may suit investors who prefer platform-based investing or regular contribution plans.
Key Takeaway
ETFs and managed funds both have a place in building long-term wealth. ETFs offer simplicity, cost-efficiency, and real-time trading, while managed funds provide access to professional active management and specialized investment strategies.
The right choice depends on:
Your investment style (hands-on vs hands-off)
The amount you're investing (lump sum vs regular contributions)
Your preference for control and transparency
Whether you value active management or prefer passive index tracking
Your sensitivity to fees and costs
As with all investment decisions, consider the tax implications, your risk tolerance, time horizon, and overall financial goals.
Important: This article provides general information only and should not be relied upon as financial advice. Neither ETFs nor managed funds are inherently "better" — the right choice depends entirely on your personal circumstances, including your:
Investment goals and time horizon
Risk tolerance and capacity for loss
Tax position
Need for liquidity
Existing portfolio structure
Preference for active vs passive management
Both ETFs and managed funds carry investment risk. The value of your investment can go down as well as up, and you may get back less than you invested. Past performance is not a reliable indicator of future returns.
Before investing in any ETF or managed fund, you should:
Read the Product Disclosure Statement (PDS) carefully
Understand the fees, risks, and investment strategy
Consider how the investment fits within your overall portfolio
Review the fund's historical performance (while remembering it doesn't guarantee future results)
Understand the tax implications for your situation
If you're unsure which investment structure is right for you, or how to build a diversified portfolio using ETFs, managed funds, or both, seek personal financial advice from a licensed financial adviser who can assess your individual circumstances.
Ready to build a diversified investment portfolio? The team at Redwood Financial Planning can help you evaluate ETFs and managed funds, select appropriate investments for your goals, and construct a portfolio that balances cost, risk, and return potential.
For more information about investing in ETFs and managed funds, visit the ASIC MoneySmart website at moneysmart.gov.au or consult the product disclosure statements for specific funds you're considering.Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial, tax, or investment advice. We recommend speaking with a qualified financial adviser before making any decisions regarding your superannuation. Every individual’s financial situation is unique, and personalised advice is essential to ensure the best outcome for your specific circumstances.
