ETFs vs managed funds: Which is best for you?

Not sure whether to go with an ETF or a managed fund? You're not alone. The part that gets most people confused is that ETFs are technically managed funds, at least in the legal sense.

Both pool your money with other investors, both are professionally managed and both aim to grow your wealth.

But in the Australian market, when we talk about "ETFs vs Managed Funds," we’re usually comparing listed ETFs (the ones you can buy and sell on the ASX) with unlisted managed funds (the traditional ones you access directly or through an advisor).

In this guide, we unpack how these two options stack up in terms of fees, flexibility, tax and transparency and which one could work better for your investing goals.

What is a Managed Fund?

A managed fund is a type of investment fund that pools your money with other investors. They’re run by a professional fund manager who decides where to invest it, whether into stocks, bonds, cash or gold.

Unlike ETFs, you can’t trade managed funds on the ASX; instead, you typically access them via an advisor, specialised investment platforms, or directly through the fund manager.

You’ll often need a minimum of $5,000 or more to start investing in a managed fund directly and unlike with stocks or ETFs which are almost instant, transactions are processed at the end of each day.

There are many kinds of managed funds and you may even be invested in one without realising it. For example, superannuation funds and ETFs are just 2 different kinds of managed funds. But for the purposes of comparison, we’ll be looking specifically at ‘unlisted managed funds’ vs ETFs.

What is an ETF?

An ETF (exchange traded fund) is a type of managed fund you can buy on the stock exchange, just like a regular stock. It gives you instant access to a bunch of investments in one go. That could be the top 200 Australian shares, global tech stocks or even commodities like gold and silver.

They’re popular because they’re easy to buy and sell, they (usually) have low fees and they’re transparent. You can start investing with just a few hundred dollars (sometimes much less) using an online broker and you’ll know exactly what’s in the fund because most ETFs publish their full holdings every day.

Plus, you can buy or sell any time the share market is open and your transaction is processed almost instantly. This gives them an advantage over unlisted managed funds, which can take up to a day to process transactions while holdings may be published every few months.

Key differences at a glance

What are fees to access ETFs and managed funds?

There are 3 main fees to think about when investing in ETFs and managed funds. The management fees, the platform and brokerage fees and the performance fees.

Management fees (MER) are charged by the fund managers and are usually deducted annually as a small percentage of your invested funds. Performance fees, also charged by the fund managers, are usually only applied to some actively managed funds (rather than regular index funds).

Then there are the platform and brokerage fees charged by the platform you’re using to access the managed funds and ETFs. The brokerage fee is charged every time you buy or sell ETF assets while the platform fee is typically an ongoing monthly or annual subscription fee.

• MER (Management Expense Ratio): ETFs are usually cheaper, while managed funds can be over 1% (see the fee ranges in the table below).
• Performance fees: Charged by some actively managed funds if your fund hits its performance goal.
• Platform fees: Managed funds often live on expensive platforms like Netwealth.
• Brokerage: ETFs come with a one-off trading fee, typically $5-$20, charged by the online broker.

How fees compare

Tax implications of ETFs vs managed funds

When it comes to tax, ETFs and managed funds work in a similar way, because most ETFs are also unit trusts. Both can pass income and capital gains on to you through their distributions, which you declare in your tax return, and you pay capital gains tax (CGT) on any gain when you sell your units. Index ETFs tend to buy and sell less inside the fund, so they may pass on fewer capital gains than an actively managed fund, which gives you a bit more control over when you realise gains.

With unlisted managed funds, especially actively managed ones, this tends to matter more. Because the fund manager may buy or sell assets within the fund throughout the year, any capital gains made can be passed on to you. That means you could receive a tax statement showing gains, even if you didn’t sell your investment.

It’s one of the quirks of how unlisted managed funds operate and something to be aware of before tax time.

Which is better for long-term investing?

When it comes to growing your money over the long term, the biggest differences often come down to fees and accessibility. ETFs typically offer lower management fees and you can buy and sell them instantly on the ASX through any online broker. This makes them an appealing choice for self-directed investors who want flexibility and cost-efficiency.

Managed funds, whether active or passive, tend to have higher fees and may include platform costs if accessed through an adviser or investment service. They also have longer settlement times and you usually can't buy or sell units instantly.

However, they may offer features like automatic reinvestment and regular investment plans, which some investors value for long-term, set-and-forget strategies. So the better option really depends on how much control you want and how much you're willing to pay for convenience.

ETFs or managed funds: Which is best?

The choice between ETFs and regular managed funds really comes down to how hands-on you want to be and where you're investing from. If you're someone who likes to be in control, wants the freedom to buy and sell on your own terms and prefers lower fees, ETFs are a great fit. You can trade them online just like shares and they’re super transparent about what you’re actually investing in

But if you're looking for something more hands-off, especially within your super or through an investment platform, a managed fund might be better suited. You hand over the reins to a professional and let them do the work. You won’t be trading day-to-day and while fees tend to be higher, it comes with a level of convenience some investors prefer.

ETFs win on cost, control and transparency. Managed funds still have their place, especially for super and hands-off investors, but if you’re managing your own money, ETFs give you more bang for buck.

Our expert says

"I invest in a mix of passive ETFs and managed funds. I invest a lump sum every year into an index fund tracking global tech stocks plus a couple of thematic ETFs, including one commodity ETF. But I also use a micro-investment platform where I make regular small deposits into an actively managed fund of global stocks. ETFs give me the opportunity to hone in on very specific investment themes as well as broad market indices, while I choose to auto-invest and add superannuation into managed funds for convenience."

Kylie Purcell

Investments Analyst

• Are ETFs or managed funds better?

  ETFs are usually better for DIY, low-cost investing. Managed funds suit long-term, hands-off goals of high net worth investors.

• Do ETFs pay dividends like managed funds?

  Yes, many do. And you can often reinvest them automatically.

• Are managed funds safer than ETFs?

  Not really. Safety depends on what they invest in, not the structure.

• Can I switch from a managed fund to an ETF?

  Yes but it may trigger capital gains tax. If working with a lot of money, talk to an adviser first.

Written by

Kylie Purcell

Investments Analyst

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Kylie Purcell is an experienced investments analyst and finance journalist with over a decade of expertise in a wide range of financial products, including online trading platforms, robo-advisors, stocks, ETFs and cryptocurrencies. She is a sought-after commentator and regularly shares her insights on the AFR, Yahoo Finance, The Motley Fool, SBS and News.com.au. Kylie hosts the Investment Finder video series and actively contributes to the investment community as a judge and panellist. She holds a Master of Arts in International Journalism, a Graduate Diploma in Economics, and ASIC-recognised certifications in securities and managed investments. See full bio

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Kylie has written 166 Finder guides across topics including:

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