How do you know whether it’s better to go with ETFs vs managed funds, or buy your shares direct?
There are a number of investments available to everyday Australians. However trying to figure out what’s right for you and your investment goals is challenging. Especially if you don’t know all your options.
You may not know it, but you’re probably already invested in most of the options via your super. Investments such as Exchange Traded Funds (ETFs), managed funds and direct shares are already accessible in your superannuation fund, depending on where your funds are held.
However, investing in these assets outside super could really help your long-term investment plans. It will allow you to grow your asset base quicker than parking your funds in cash over the long term.
When you invest in shares, each share you own represents a portion of ownership of a company. That means the more shares you own, the larger your direct ownership of the business is.
When investing in a managed fund, however, your money is pooled along with other investors. It’s then invested in either a single asset fund or across a range of asset classes (diversified fund). This all happens within the one fund and is managed by an investment manager such as Platinum, Colonial, Bentham, etc.
ETF stands for exchange traded fund, and just like a share, it is traded on a stock exchange such as the ASX or NASDAQ. But unlike a share, which focuses on one company, an ETF tracks an index, a commodity, bonds, or a basket of securities.
When investing in a ETF or managed fund, you are usually going into a fund that is looked after by a professional investment manager. They are ultimately responsible for all investment decisions. This might be the best option for you if you have a smaller amount to invest. Or if you’re not confident when making investment decisions.
ETFs vs managed funds vs shares considerations
When it comes to investing in either in shares or managed funds, there are a number of different considerations. The following are some of the key factors to keep in mind when deciding which option is right for you.
When buying or selling shares there are brokerage costs that’ll need to be paid. This may be a flat fee for a small amount – usually around $10-$20 for trades under $20,000 – and usually a percentage for everything above that. The percentage will change depending on the platform.
Investors can use a traditional managed fund or an ETF to establish a low-cost, well-diversified portfolio of stocks, bonds and other assets. ETFs do tend to be cheaper as they are indexed funds and usually try to match a index, which doesn’t involve a lot of active management.
Fees for ETFs vs managed funds vary depending on the fund, but there are generally both ongoing management fees and administration charges. It’s important to read the Product Disclosure Statement for details on fees and charges before deciding to invest in a particular fund.
Ease of buying and selling
When you own shares or units in an ETF, finding out the latest share or unit price is as easy as signing into your online trading platform. You can typically buy and sell them within market hours.
Managed funds however usually have their value recalculated on each business day. Rather than finding a buyer through the sharemarket, you either transfer your units off-market or withdraw your investment. This can potentially take days or weeks to process depending on the type of fund you are invested in.
Investment styles and diversification
In order to have a diversified share portfolio, you’d need to invest in a range of different industries, both within Australia and internationally. This is likely to require a significant amount of capital to achieve.
With a managed fund or ETF, however, it’s possible to get exposure across and within a wide range of asset classes all in the one fund. There are thousands of funds available to invest in with different sectors, industries and investment styles to choose from.
Your goals and objectives
As with all investment decisions you should think about your time frame for investing.
When do you potentially need those funds? What type of tax benefits are you looking for? What level of control do you want when making those investment decisions?
Your answers to these questions will also guide your investment decision.
This is an edited version of an article that originally appeared on RP Wealth Management. It’s republished here with permission. This article contains general information only. This should not be relied on as independent finance or tax advice. If you are after specific professional advice, speak to your registered tax agent/financial advisor or reach out to the team at RP Wealth Management.