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How do Active ETFs and managed funds differ?

Active Exchange Traded Funds (Active ETFs) and managed funds share many similarities, but there are important differences. With a rise in the popularity of ETFs and the introduction of more Active ETFs, the differences between the two actively managed investment options are important considerations for investors.

The similarities between Active ETFs and managed funds include:

  • Active management: The investment manager is attempting to beat an index or benchmark.
  • Open-ended nature creates liquidity (the ease of buying and selling): The fund regularly creates and redeems units, typically daily, depending on supply and demand.
  • Diversification: Investors receive a portfolio of securities in one investment.
  • Regulated trust structure: They are both subject to the same regulatory protections.
  • Limited disclosure: Active ETFs disclose portfolio holdings quarterly while managed funds are not required to disclose, but usually provide top 10 holdings.

Investing in a managed fund

Managed funds are not bought like shares on the stock exchange and investors only know their entry or exit price on a T+1 basis (T+1 means settlement occurs the next day. A unit bought on Monday would settle on Tuesday). The two main ways to invest in a managed funds are:

  • Via a platform (also known as a ‘wrap’), which generally requires investors to pay a platform administration fee.
  • Direct with the fund, which requires investors to fill out forms directly with the fund manager to buy and sell units.

Investing in an Active ETF

Active ETFs, however, are traded on the stock exchange:

  • Units can be bought and sold like shares using a broker.
  • Investors can trade at live prices during the day.
  • Units generally trade at a tight spread around the Active ETF’s net asset value (NAV).

Exchange trading creates a number of benefits:

  • Ease of use: Active ETFs do not require time-consuming forms to buy units (although for some managed funds and through some brokers, ASX’s mFund service usually reduces this workload).
  • Portfolio management: Active ETF units are held alongside shares and ETFs in a broker account making record keeping and tax time easier. Dividends and income are also paid into the same account as shares and ETFs.
  • Generally lower cost: While investors pay a brokerage fee to buy Active ETFs, they avoid platform administration fees and higher fees often charged when investing in managed funds.

However, there are risks that need to be considered:

  • Liquidity: Although the units are quoted on the AQUA market of the ASX, there can be no assurance that there will be a liquid market for units, and no assurance that there will be a liquid market for the fund’s underlying investments. In certain circumstances, the ASX may even suspend trading of an Active ETF.
  • ASX trading price: The trading price of units on the ASX may differ from the NAV per unit and the indicative NAV (iNAV).
  • Market making: As the responsible entity intends to act as a market maker in the units on behalf of the Active ETF, the fund bears the cost and risk of these market-making activities.

When making any investment decision, it pays to explore the alternative features.

 

Paul Gambale is a Product Director at AMP Capital, a sponsor of Cuffelinks. This article is general information and does not consider the circumstances of any investor.

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