Investing your money in order to generate a regular income can be very useful, especially if you’re looking for ways to fund your retirement. But when you’re searching for the most suitable income investment plan, there are a number of different options available. Two of the most common investment structures are called exchange-traded funds (ETFs) and managed funds.
Unfortunately, there’s been some confusion regarding the distinction between the newer ETFs and more traditional managed funds. But once you understand the difference between the two, you’ll be able to decide which one is best suited for your current circumstances as well as your anticipated future lifestyle.
ETFs vs managed funds
Both exchange-traded funds and managed funds are a mixture of different assets that allow diversity in investments. They also rely heavily on how experienced the portfolio or fund manager is, as well as how skillfully they can outperform specific benchmarks. But there’s also a number of key differences between both types of funds, particularly in how they’re managed, with different considerations that need to be weighed up.
Deciding between two different investment vehicles is often a tough decision. So before you choose whether to invest your money in an ETF or a managed funds, here are some key differences for you to consider.
When you invest your money in a managed fund, it is combined together with money from other investors by an investment manager. The money is then invested in shares or other assets on your behalf such as a single asset fund or a diversified fund, which is spread across a variety of asset classes. And when you’re investing in shares, each one you own represents a percentage of company ownership.
The main issue with managed funds is that there’s relatively little data known about specific holdings, so investors who are trading managed funds won’t know the exact exit price until the following day. That’s because the price of trading them is either worth the net value of the assets or at the end-of-the-day price. That means you may also have to wait a number of days before receiving money when making the sale.
There’s also some risk involved with a managed fund as it is bought directly from the fund manager. By allowing individual fund managers to invest in stocks, it can create issues such as an overly diversified portfolio with too many varying asset classes. It can also minimize the risk levels and impacts of poor performance by any particular sector or industry.
Exchange-traded funds are managed and trading like a share on secondary stock markets like the ASX or NASDAQ. But unlike stocks that are focused on a single company, an ETF is tracked as an index and traded like commodities, securities, or bonds.
ETFs are generally very transparent with their all details, as all underlying investments are readily available at any time. In fact, everything is usually able to be checked either via your investment manager or on their website. And because ETFs are bought, sold, and traded just like shares, it is generally a fast and convenient process to use a broker with a market account.
While it may not seem like much, an ETF can be significantly better for many investors. That’s because it allows them to trade at any time with their stockbroking account, which also makes it easier to manage their tax. And with a new generation of investors learning all of these benefits, the ETF industry has continued to grow exponentially throughout the investment landscape.
While there’s a lot of positive aspects of an exchange-traded fund, like pricing, liquidity, and flexibility, remember too that managed funds may still suit investors who are looking to reinvest or withdraw funds regularly. And whether you’re investing in an ETF or a managed fund, both will be looked after by an expert investment manager who is ultimately responsible for the decisions regarding your fund.