ETFs vs Managed Funds — Which Is Better?

Fees and Costs

The most significant difference between ETFs and managed funds is cost. ETFs traded on the ASX typically charge management expense ratios (MER) between 0.04% and 0.75% per annum, with many popular index-tracking ETFs charging under 0.10%. Managed funds, by contrast, often charge 0.70% to 2.00% or more, particularly actively managed funds that employ research teams and analysts.

In addition to the MER, ETFs incur brokerage fees ($5–$20 per trade) and small bid/offer spreads (typically 0.05%–0.30%). Managed funds may charge buy/sell spreads (0.20%–0.60%) and platform fees (0.10%–0.50%) if accessed through an investment platform. Over a 40-year investment horizon, the difference between a 0.10% fee and a 1.00% fee on a $10,000 investment could amount to tens of thousands of dollars in forgone returns.

Tax Efficiency and Control

ETFs are generally considered more tax-efficient than unlisted managed funds due to their structure. When investors sell ETF units, the transaction is facilitated through authorised participants using in-kind redemptions, which means the fund itself does not need to sell underlying assets. This avoids triggering capital gains for remaining investors. Managed funds, by contrast, may need to sell assets to meet redemptions, potentially distributing capital gains to all unitholders.

Another tax consideration is portfolio turnover. Actively managed funds typically trade more frequently, generating higher levels of realised capital gains that are passed on to investors as annual distributions. Investors in managed funds may receive taxable capital gains distributions even if they have not sold any units. With ETFs, investors generally have more control over when capital gains are realised, as CGT is triggered only when the investor sells their units.

Liquidity, Accessibility and Minimum Investment

ETFs trade on the ASX like shares, meaning you can buy and sell them at any time during market hours at a real-time market price. The minimum investment is typically the price of one unit, often $50–$500, making ETFs accessible with relatively small amounts. Managed funds are priced once daily (or less frequently) and transactions are processed at the next available unit price, so you cannot trade intra-day.

Managed funds often require minimum initial investments of $5,000 or more, making them less accessible for new investors. However, managed funds can be a better fit for investors using a financial adviser or investing through superannuation platforms, where the administrative burden is handled for you. Many managed funds also offer regular investment plans with lower minimums, starting from $100 per month.

Which Structure Suits Your Situation?

The choice between ETFs and managed funds depends on your investment style, goals, and how involved you want to be. ETFs suit investors who prefer lower costs, real-time trading, and tax efficiency. They are ideal for self-directed investors comfortable making their own decisions and managing a portfolio through an online broker. Managed funds suit investors who prefer professional management and are investing through a financial adviser or superannuation platform.

Consider your time horizon and investment amount. If you are starting with a small amount, ETFs offer lower minimums. If you are making regular small investments, managed funds with regular investment plans may be more convenient. For larger sums invested through an adviser, the administrative ease of managed funds may outweigh the cost difference. Many investors use both — ETFs for core market exposure and managed funds for specific active strategies or sectors where professional management adds value.

Performance Comparison — Do Higher Fees Deliver Better Returns?

A critical question for any investor is whether the higher fees of managed funds translate into superior returns. The evidence is mixed. Studies by S&P Dow Jones Indices consistently show that over 5- and 10-year periods, the majority of actively managed funds in Australia underperform their benchmark indices after fees. For example, the S&P Indices Versus Active (SPIVA) Australia Scorecard has found that approximately 70-80% of Australian equity active funds underperform the S&P/ASX 200 over rolling five-year periods.

However, past performance is not indicative of future results, and there are skilled active managers who have consistently outperformed. The key question for your adviser is not "active or passive" but rather "what is the evidence that this specific fund manager can add value after fees?" Your SOA should address this directly, particularly if the recommended managed funds carry fees significantly above index fund alternatives. If the reasoning is simply "this fund has performed well recently," that may not satisfy the best interests duty requirement to consider the cost and value of recommended products.

Practical Portfolio Construction

Many investors use a core-satellite approach: a core portfolio of low-cost index ETFs providing broad market exposure (e.g., an Australian shares ETF, an international shares ETF, and a bond ETF), supplemented by smaller satellite positions in actively managed funds in specific sectors where active management may add value (such as small-cap shares, emerging markets, or alternative assets). This approach captures the cost efficiency of indexing while retaining the potential for alpha from skilled managers.

When constructing a portfolio through a financial adviser, the choice between ETFs and managed funds also depends on the adviser's platform and fee structure. Some adviser platforms offer managed funds with lower minimums and consolidated reporting, while ETFs may incur additional brokerage on each trade. Your adviser should explain how the recommended investment vehicle fits within their broader service offering and fee arrangement. If you are paying an ongoing advice fee calculated as a percentage of funds under management, lower-cost ETFs may ultimately be more cost-effective than higher-cost managed funds because the compounding effect of lower investment fees benefits your net returns.