If you’ve started researching investment options, you’ve probably come across both exchange traded funds (ETFs) and managed funds. They’re two of the most popular ways Australians can invest in a diversified portfolio without having to select individual shares or other assets themselves.
Because they share many similarities, it’s easy to assume one is simply a better version of the other. In reality, that’s rarely the case. Both investment structures can play an important role in building long-term wealth, but they work differently and may suit different types of investors, objectives and financial strategies.
Understanding how each option operates can help you make more informed investment decisions and avoid selecting a product simply because it’s currently popular or widely discussed.
Understanding ETFs vs Managed Funds
Although both ETFs and managed funds pool money from multiple investors to create diversified portfolios, the way they’re structured and managed differs in several important ways.
An Exchange Traded Fund (ETF) is an investment fund that trades on the Australian Securities Exchange (ASX), much like individual company shares. Investors can buy and sell ETF units throughout the trading day using a brokerage account, with prices fluctuating as the market moves.
Many ETFs are designed to track the performance of a particular market index, such as the S&P/ASX 200, rather than trying to outperform it. This approach is known as passive investing, where the goal is to mirror market performance rather than actively selecting investments. Because there’s generally less ongoing management involved, ETFs often have relatively low management costs while still providing broad diversification across many companies or asset classes.
A managed fund, on the other hand, is an investment portfolio overseen by professional investment managers. Depending on the fund’s objectives, managers may actively research, select and adjust investments in an attempt to outperform the market, or they may follow a passive strategy similar to some ETFs.
Unlike ETFs, managed funds don’t trade on the share market throughout the day. Instead, investors buy and redeem units directly through the fund, with transactions typically processed using a daily unit price based on the value of the underlying investments. Professional fund managers make the investment decisions on behalf of investors, allowing individuals to benefit from specialist expertise without needing to actively monitor the portfolio themselves.
The Key Differences and When Each May Be Suitable
While both investment options provide diversification, several practical differences can influence which approach may better suit your circumstances.
One of the biggest distinctions is how investments are bought and sold. ETFs trade on the ASX during market hours, giving investors flexibility to buy or sell whenever the market is open. Managed funds generally process applications and withdrawals once each business day using the fund’s calculated unit price.
Investment management also differs. Many ETFs simply follow an index, making them suitable for investors who are comfortable accepting market returns over the long term. Managed funds may instead use active management, where investment professionals continually assess opportunities, manage risk and adjust the portfolio as market conditions change.
Costs can vary as well. Passive ETFs often have lower management fees because they require less ongoing research and trading. Actively managed funds generally incur higher costs to support the expertise and resources involved in managing the portfolio. Higher fees don’t automatically translate into better performance, but some investors value the additional oversight and specialist knowledge.
There are also differences in minimum investment amounts, liquidity and transparency. ETFs often allow investors to begin with relatively modest amounts through a brokerage account and provide visibility of market pricing throughout the trading day. Managed funds may have higher minimum investment requirements depending on the provider, while portfolio holdings and pricing are typically updated less frequently.
For investors who prefer a straightforward, lower-cost investment approach and are comfortable managing their own portfolio decisions, ETFs may be an attractive option. Conversely, managed funds may appeal to investors seeking professional decision-making, access to specialist investment strategies or exposure to asset classes that may not be readily available through traditional ETFs.
ETFs vs Managed Funds: Why the Best Solution May Include Both
Choosing between ETFs and managed funds isn’t necessarily an either-or decision. In fact, many well-diversified investment portfolios include both.
Each investment vehicle can serve a different purpose. For example, an investor might use broad market ETFs as the foundation of their portfolio to provide cost-effective exposure to Australian and international shares, while complementing them with actively managed funds focused on specialist sectors, emerging markets or alternative investment opportunities.
Importantly, the investment product itself is only one piece of the puzzle. Factors such as your investment timeframe, tolerance for market volatility, tax position, cash flow needs and overall financial objectives are often far more influential in determining an appropriate investment strategy.
A well-constructed portfolio should reflect your personal circumstances rather than simply following investment trends. What works well for one investor may not be appropriate for another, even if their portfolios appear similar on the surface.
This is why professional advice often focuses first on developing an appropriate investment strategy before selecting individual investment products. Once your goals, risk profile and long-term objectives are clearly understood, choosing between ETFs, managed funds or a combination of both becomes a more informed and purposeful decision.
Looking Beyond Investment Products
ETFs and managed funds are both valuable investment tools, each offering unique advantages depending on your goals and investment preferences. Rather than asking which option is universally better, a more useful question is which approach best supports your broader financial strategy. By understanding how each investment works and considering factors beyond fees or recent performance, you can make decisions that are better aligned with your long-term wealth objectives.
Whether you’re considering ETFs, managed funds or a combination of both, making the right investment decisions starts with understanding how they fit within your broader financial strategy. The experienced team at Priority Advisory Group can help you assess your goals, risk tolerance and investment options to build a portfolio that’s aligned with your long-term objectives. Contact us on 1300 349 188 or enquire online to arrange a conversation about your investment strategy.
Further reading: https://moneysmart.gov.au/managed-funds-and-etfs
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Please note the information provided within this article is general of nature and is not a personal advice recommendation. Prior to considering strategies discussed in this article we recommend you seek personal financial advice. Please be aware that, without the benefit of financial advice, you may be committing yourself to financial strategies or products that are not appropriate for your overall personal situation, needs and objectives.