Actively Managed ETFs vs Managed Funds: Critical Differences

Actively Managed ETFs vs Managed Funds: Critical Differences

The universe of managed funds is huge and deciding where to place your assets can be as tricky as choosing single shares.

In the broadest sense, exchange-traded funds (ETFs) can be divided into two groups: active and passive.

Traditionally, ETFs are passive investments that track an index. However, the first active ETF was introduced into Australia in 2015, to give investors access to professionally managed funds on the Australian Stock Exchange (ASX) via a simple trade.

Investors often ask us questions, such as what is the difference between an active ETF and a passive ETF or how do you tell if an ETF is active or passive?

Passive ETFs track a market index, industry, or commodity, while Active ETFs are actively managed by a portfolio manager who selects and manages a basket of underlying stocks with the aim of outperforming the market.

Having looked at the difference between passive ETFs versus active ETFs, what are the similarities and the main differences between actively managed ETFs and managed funds for investors?

Broadly speaking, investors in active ETFs and traditional managed funds make the same decision: they choose the expertise of a fund manager to decide where and when to invest. Active ETFs aim to outperform the benchmark index, and managers choose stocks and weightings depending on the fund strategy and investment objectives. Like traditional managed funds, active ETFs give investors the opportunity to beat the market by tapping on the knowledge and experience of financial professionals.

This is because active management – whether through active ETFs or managed funds – offer the opportunity to benefit from market inefficiencies. Share prices are often driven by sentiment rather than long-term fundamentals.

A sudden drop in Apple shares, for example, might spook the market and affect the stock prices of other technology companies that aren’t related to Apple. Or a robust business with long-term performance potential might announce positive earnings, but its shares fall because a negative, short-term news story relating to that firm unsettles the market. Active managers seek to look through these short-term inefficiencies and potentially profit from them.

More recently, some fund managers have started offering access to funds that combine the features of both active ETFs and managed funds. This means, investors can choose to invest in the Fund either through the Australian stock exchange or directly with fund manager using an application form, depending on their preferred method of access.

So, while the underlying strategy and investment style is the same, there are key differences between the structure and access of the product. The below table highlights the main differences:

  Active ETF Managed fund 
Availability Quoted or listed Unlisted 
Liquidity 

 
  • Open-ended
  • Issues / cancels units daily
  • Trades on the stock exchange
  • Fund acts as a market maker to provide liquidity
  • Open-ended
  • Regularly issues /cancels units
  • Does not trade on the stock exchange
Pricing
 
  • Live pricing on the stock exchange
  • Generally expected to trade at a tight
    spread around the NAV, reflecting the open-ended nature of the fund
  • Instant price confirmation
  • No cooling off rights (same as other listed securities)
  • Entry / exit price generally not known
    until trade + 1 day
  • Cooling off rights as outlined in the Product Disclosure Statement (PDS)
     
Disclosure Full holdings are disclosed either monthly or quarterly on a lagged basis, subject to Australian stock exchange approval. Typically, holdings are disclosed monthly with a 30-day lag.
Minimum investment
 
No minimum Typically A$25,000
Application process including anti-money laundering (AML) and know-your-customer (KYC)
  • Must have a broker account
  • No application form, AML or KYC required apart from the initial application for a brokerage account.
  • Investing directly requires an application form, AML and KYC documents for each fund manager.

 
Essentially the main difference boils down to access, which may mean an Active ETF may suit investors looking to invest but have smaller deposits or want the simplicity of buying and selling on a stock exchange. For more information on how Active ETFs differ to other products, download our Active ETF product distinctions flyer (PDF).

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. The Target Market Determination (TMD) for Fidelity Australian product(s) can be found at www.Fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

© 2022 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

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