Active ETFs and managed funds share many similarities, but also have some differences. With a rise in the popularity of ETFs, and the introduction of more Active ETFs into the market, the difference between the two actively managed investment options is an important consideration for investors.
Active Exchange Traded Funds (ETFs) and managed funds share many similarities, along with differences in how units are traded. With a rise in the popularity of ETFs, and the introduction of more Active ETFs into the market, the difference between the two actively managed investment options is an important consideration for investors.
The similarities Active ETFs and managed funds share include:
- Active management: the investment manager is attempting to beat their index or benchmark
- Open-ended which creates liquidity (the ease of buying and selling): the fund regularly creates and redeems units, typically daily, depending on supply and demand
- Diversification: Investors get a portfolio of securities in one investment
- Regulated trust structure: This means they are subject to the same regulatory protections
- Limited disclosure: Active ETFs disclose portfolio holdings quarterly; managed funds are not required to disclose (but usually provide top 10 holdings)
But there are significant differences in how Active ETF and managed fund units are traded.
Trading a managed fund
Investors can buy and sell managed funds in two ways:
- 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.
Managed funds can’t be bought on the stock exchange and investors only know their entry/exit price on a T+1 basis (T+1 means settlement occurs the next day. A unit bought on Monday would therefore be settled on Tuesday).
Trading an Active ETF
Active ETFs, however, are traded on the stock exchange. That delivers several advantages:
- 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 other benefits:
- Ease of use: Active ETFs don’t require time-consuming forms to buy units.
- Portfolio management: Active ETF units are held alongside shares and ETFs in a broker account making record keeping and tax time easy. 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 investors buy funds direct.
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 investments.
- ASX trading price – the trading price of units on the ASX may differ from the Net Asset Value (NAV) per unit and the indicative NAV (iNAV).
- ASX trading – in certain circumstances, the ASX may suspend trading of the units of the Fund and in that event unitholders would not be able to buy or sell units of the Fund on the ASX.
- Market making – as the responsible entity, intends to act as a market maker in the units on behalf of the Fund, the Fund will bear the cost and risk of these market making activities.
When making any investment decision, it pays to explore the various options you have, so that you can best position your portfolio for success.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.