Income investing: Managed funds vs. ETFs
There are a number of options when it comes to choosing an income investment scheme. Investments that generate regular income can be useful in a number of various situations, such as funding your retirement lifestyle.
Despite the potential benefits, investing for income has become challenging for many people in today’s low-interest rate environment, with cash-based investments such as savings accounts and term deposits creating minimal income. Looking elsewhere can provide options such as managed funds or exchange-traded funds (ETFs).
Managed funds are where your money is pooled together with other investors and then bought and sold by an investment manager via shares or other assets on your behalf. ETFs are a type of managed fund that can be bought and sold on a secondary market like a share. Choosing between the two investment vehicles can be a tough decision, as there are both notable similarities and differences to consider:
- Pricing: When buying and selling managed funds, investors won’t know their exit price until the next day as pricing is set on a T+1 (day of trade plus 1) basis. A sale takes place either at the end-of-the-day price or on the net asset value of the assets. You could have to wait several days to receive your money from the sale.
- Risk: It is up to the individual fund manager to invest in particular stocks, allowing you to access a diversified portfolio made up of varying asset classes. This can reduce your level of risk by minimising the impact of poor performance by a particular industry or sector.
- Transparency: ETFs are typically more transparent than actively managed funds. An investment manager’s website can have its underlying investments readily able to be seen, where managed funds provide relatively little information about the holdings of the fund.
- Buying and selling: Arguably faster and more convenient than the trade of managed funds, ETFs are bought and sold like shares, meaning you will need a sharemarket account and a broker. On the other hand, a managed fund is bought from the fund manager.
Managed funds and ETFs are legally known as trusts, with the underlying assets owned by the trustee on behalf of unitholders. As unitholders, you are entitled to receive dividends (after fees) and any capital gains after any capital losses. They are both typically open-ended investment funds, meaning that they are not limited by a fixed number of units. Depending on supply and demand, they both regularly create and redeem units, making them liquid investments.