ETFs vs. Actively Managed Funds


You must have heard enough about the need for a strong investment plan. Each investor has a different set of investment goals. The capital available for use, the liquidity expected the plan for emergency funds and many such factors are known to influence the investment strategies. If you are looking to make large profits and cut down taxes, and if you do not have the time to do this, you would be able to approach an investment advisor to get the best recommendations.

With investments, there are funds that you can fully control yourself. These are great choices if you know the chosen investment option well and if you have the time to watch the market and take all the vital decisions. But if you are looking for assistance in managing your funds, then there are many managed funds available. Among them, ETFs and actively managed funds are the most popular choices.

ETFs or exchange-traded funds

There is an assortment of assets picked for the ETF. The ownership of these assets is then shared. The bulk ownership is distributed in this case and the individual investors do not have ownership of any of the underlying assets. But the shareholders can all claim their share in the profits made by these assets.

Actively managed funds

With trading and investments a lot has changed and now there are even automated bots taking care of the entire process. But there are many who still feel more comfortable working with a personal fund manager. Actively managed funds are where there is a fund manager allocated to handle your funds. The active involvement of the fund manager results in higher fees but you also get the best recommendations if you choose the right fund manager.

Portfolio management

With ETFs, there is one major advantage and that is the relatively lower fee. Actively managed funds and mutual funds in general still hold a major share in the managed funds category. But there are more and more financial institutions now offering ETFs where the active management is removed resulting in a lower fee. This is thus becoming one important choice for small level investors who are not willing to pay large fees to the fund managers.

With ETFs, you get to access your portfolio and understand the transactions every single day. With actively managed funds there is very little control that the investor has in terms of the transactions that take place. There might be periodic disclosure of the portfolio. But the fund manager handles all the transactions.

Tax matters

With ETFs, there is the transfer of securities that take place. Each of the shareholders that share the ownership is not entitled to the absolute ownership of any of the assets. Without ownership, the taxes to be also come down. In terms of tax efficiency, ETFs are thus slightly better than actively managed funds.

Net asset value

With actively managed funds the fund manager invests the capital on mutual funds and the NAV or net asset value is calculated when the session closes even if you place a closure request much earlier. With ETFs, the closure can happen at any point of the day when the session is active.