ETFs combine the ease of stock trading with the diversification benefits of managed funds. While ETFs, managed funds, and stocks have similarities, understanding their differences is key to ensure you select the appropriate vehicle.
A Quick Comparison
How similar are ETFs to managed funds and individual stocks? Compare these three investment vehicles:
ETFs and managed funds either seek to track or try to outperform the performance of an index, such as the S&P / ASX 200 Index. They provide access to many companies or investments in one single trade, removing single stock risk, or the risk inherent in being exposed to just one company.
This diversification across many securities can dilute the potential negative impact of poor performance that any one security may have, thus lowering the risk that an individual stock could hurt the portfolio’s overall performance.
Fees and Expenses
Both ETFs and managed funds have an expense ratio, which includes management fees and the fund’s total annual operating expenses. Historically, index ETFs have had a lower average expense ratio—0.4%,1 while index mutual funds have had a higher average expense ratio—0.71%.1 Individual stocks do not have an expense ratio.
Because ETFs and individual stocks are bought and sold on an exchange, they are both subject to a transaction fee (or commission). Managed fund transactions do not incur commissions, but may incur other sales charges.
It’s important to consider the total cost of ownership (TCO) for any investment, both the expense ratio and the trading costs.
Because investors can buy and sell ETF shares on an exchange continuously throughout the day, like individual stocks, ETF pricing captures the current market price. Their cost may be slightly more or less than their net asset value (NAV).
Managed fund shares are priced once at the end of the trading day. Investors purchase and redeem units at the closing value of the fund. The price or net asset value (NAV) is the value of the fund’s assets, less liabilities, divided by the total number of units outstanding.
Similar to individual stocks, with ETFs, there is no minimum investment requirement.2 An investor can purchase as few as one ETF share or as many as preferred. Managed funds may require investment minimums.
When an investor decides to sell ETF shares or individual stocks, any associated capital gains tax is paid at the time of final sale. This offers greater control on the timing of tax consequences.3
In contrast, when an investor decides to sell a share of a managed fund, the fund manager may sell a portion of the fund’s security holdings in order to deliver cash in the amount of an investor’s position. This sale may generate a realised taxable gain, and taxes on those gains are absorbed by the remaining shareholders in the fund.
Learn More about ETFs
Take a Look at Creation / Redemption
Learn about the process, unique to ETFs, where baskets can be assembled and disassembled as demand changes.
1 Source: Morningstar Direct, as of 31/12/2019. Average Indirect Cost Ratio (ICR) for Indexed ETFs and Indexed Open End Funds as defined by Morningstar. The ICR is the sum of the expenses incurred by the fund expressed as a percentage of the average net assets throughout the year. The ICR includes management and performance fees, as well as other operational fees.
2 Subject to brokerage rules/costs/fees.
3However, changes in an ETF’s underlying index could trigger the sale of securities which, in addition to transaction costs, may trigger capital gains distributions. In this scenario, any realised gains or losses are passed on to ETF shareholders. To ensure tax efficiency, ETF managers attempt to limit these types of transactions as much as possible.
Closing Net Asset Value
A mutual fund’s price per share value based on the closing market prices of the securities in the fund’s portfolio.
The current price at which an asset is bought or sold in the marketplace.
Net Asset Value (NAV)
The price of a share determined by the total value of the securities in the underlying portfolio, less any liabilities.
Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, Australia Services Limited (ASL) (AFSL Number 274900, ABN 16 108 671 441) is the issuer of interests and the Responsible Entity for the ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF. This material should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. SPDR and Standard & Poor's® S&P® indices are trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by State Street Corporation. The Dow Jones Global Select Real Estate Securities Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by State Street Global Advisors, ASL. MSCI indices, the property of MSCI, Inc. ("MSCI"), and ASX®, a registered trademark of ASX Operations Pty Limited, have been licensed for use by State Street Global Advisors, ASL. SPDR products are not sponsored, endorsed, sold or promoted by any of these entities and none of these entities bear any liability with respect to the ETFs or make any representation, warranty or condition regarding the advisability of buying, selling or holding units in the ETFs issued by State Street Global Advisors, ASL. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY". State Street Global Advisors, ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") which have been created over units in SPY and are quoted on the AQUA market of the ASX. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors, ASL's express written consent.