ETFs and managed funds both give investors access to a diversified portfolio through a pooled investment vehicle. But they differ significantly in how they are bought, how they are managed, what they cost, and their tax treatment. For most Australian retail investors, low-cost index ETFs have become the preferred vehicle — but managed funds still have a place in certain portfolios.
What Is a Managed Fund?
A managed fund (sometimes called a unit trust) pools money from multiple investors to buy a portfolio of assets. An investment manager (fund manager) decides what to buy and sell. Investors buy and redeem units directly through the fund manager at a price set once per day (end-of-day NAV).
Well-known Australian managed fund managers: Platinum Asset Management, Magellan Financial Group, Perpetual, Pendal.
Key Differences
| Feature | ETF (index) | Managed fund (active) |
|---|---|---|
| How purchased | On the ASX via broker | Direct from fund manager or via platform |
| Pricing | Real-time during market hours | Once daily (end-of-day NAV) |
| Minimum investment | Cost of 1 unit (often $30–$150) | Often $1,000–$5,000 minimum |
| Management fee (MER) | 0.04%–0.55% typical | 0.5%–2.0%+ typical |
| Performance fee | Rare | Common (15–25% of outperformance) |
| Management style | Usually passive (index tracking) | Active (stock selection) |
| Transparency | Holdings published daily | Holdings disclosed less frequently |
| Tax efficiency | Higher (low turnover, in-kind redemptions) | Lower (active trading triggers CGT events) |
| Accessibility | Any broker account | Direct application or via investment platform |
| Liquidity | Sell on ASX any trading day | Redemption typically T+3 or longer |
The Fee Difference — Compounded Over Time
The most significant practical difference is fees. Over long investment horizons, even small annual fee differences compound into large dollar amounts.
$100,000 invested for 30 years, 7% gross annual return:
| Option | Annual fee | Net return | Final value |
|---|---|---|---|
| Index ETF (VAS) | 0.07% | 6.93% | ~$752,000 |
| Low-cost managed fund | 0.50% | 6.50% | ~$661,000 |
| Mid-range active fund | 1.00% | 6.00% | ~$574,000 |
| High-cost active fund | 1.75% | 5.25% | ~$467,000 |
The fee difference between a 0.07% ETF and a 1.75% active fund costs approximately $285,000 over 30 years on a $100,000 investment — before performance fees.
Does Active Management Outperform?
The key question is whether the higher fees of active management are justified by higher returns. The S&P SPIVA Australia scorecard — published by S&P Global, tracking Australian fund performance against benchmarks — consistently shows that:
- The majority of actively managed Australian equity funds underperform their benchmark index after fees over 5, 10, and 15 year periods
- The proportion of outperforming funds declines further over longer time periods
- Past outperforming funds do not reliably continue outperforming in subsequent periods
This does not mean no managed fund ever outperforms — some do, consistently. But identifying which funds will outperform in advance is very difficult, and investors often pay high fees for underperformance.
When Managed Funds May Still Be Suitable
- Access to niche strategies — some investment strategies (unlisted property, private equity, complex fixed income) are not available via ETFs
- Absolute return strategies — funds that aim to generate positive returns regardless of market direction (though track records are mixed)
- International access via IDPS — some investors access international managed funds through Investor-Directed Portfolio Services (IDPS) platforms
- Personal preference — some investors prefer the relationship with an active manager and are comfortable paying for it
Unlisted Index Funds
A middle-ground option: Vanguard and other providers offer unlisted index funds — tracking the same indices as their ETFs (VAS tracks the same index as Vanguard’s Australian Shares index fund) but sold directly without going through the ASX. These have slightly different minimum investments and pricing mechanisms but similar low costs.
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Frequently Asked Questions
Are index ETFs always better than managed funds? Index ETFs have a structural cost advantage and a strong historical track record relative to the average active fund. However, “always better” is too absolute — some active funds do outperform over extended periods, and some niche investment strategies are only accessible through managed funds. For most retail investors building wealth over long periods, low-cost diversified index ETFs are the starting point recommended by ASIC’s MoneySmart.
Can I hold managed funds inside super? Yes. Many superannuation funds offer access to managed funds as investment options within their platform. Some SMSFs also invest in managed funds. The fee considerations are the same — high fees compound into significant wealth differences over long super accumulation periods.
What is an IDPS? An IDPS (Investor-Directed Portfolio Service) is a platform (like HUB24, Netwealth, BT Panorama) that gives investors access to a wide range of managed funds, ETFs, and other investments through a single account and tax statement. They are commonly used by financial advisers for client portfolios. Access is possible for self-directed investors but minimum investment requirements often apply.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.