Managed funds tend to have higher fees than their equivalent ETF counter parts. For example, look at the following table’s comparison between Vanguard’s Australian market ETF (VAS) and their Australian Shares Managed Fund.
| Vanguard ETF (VAS) | Vanguard Index Australian Shares Fund VAN0010AU | |
| Benchmark | S&P/ASX300 | S&P/ASX300 |
| Management expense ratio (MER) | 0.10% p.a. | 0.16% p.a. |
| Buy/sell spread | ~0.05%/0.05% | 0.05%/0.05% |
| Entry and exit costs | Brokerage | $0 |
Here we can see that the ETF has a cheaper management expense ratio than the managed fund (0.10% vs 0.16%). To this into perspective, if you had $10,000 invested you would expect to pay $10 in yearly fees for the ETF compared with $16 for the managed fund. While the managed fund would start out in front due to the lack of an entry fee, the ETF will provide a better overall return in the long run due to a lower ongoing fee. So, mathematically the ETF a better product.
However, in the world of personal finance, math is not the be-all-end all. I recently had a conversation with a friend that wished he had put more money into VAS in 2020; he was waiting for the best time to purchase more VAS units but missed out because the market kept rising. This is an example of how our own psychology works against us. More specifically this bias is referred to as loss aversion – where the pain of a loss is more significant than the euphoria of a win (Hendricks 2018). In this situation managed funds have several “features” that give them an advantage over their ETF counterparts:
- Their prices aren’t updated instantaneously
- Selling out of the fund is more cumbersome when compared with an ETF
- You can use BPay to automatically buy units
Typically, these “features” would be classed as disadvantages (who doesn’t want to know the exact price of something they are buying), however for the long-term investor, day to day price fluctuations are more of a distraction as opposed to valuable information. Combine this with the ease of buying and selling and, in some cases, they cause us to abandon our investment plans in favour of trading on emotion.
What’s the solution?
I’m a big advocate of investing for the long term and doing it consistently using a dollar cost averaging approach. If you want to commit to this style investing but can’t resist the temptation of trying to time the market, then managed funds will probably work better for you than their ETF equivalents. Simply use an auto payment system, such as BPay, to invest a set amount of money on the same day every month into your chosen managed funds. This removes any hesitation you might have to buying units and removes emotion from the task.
In conclusion, even though buying the managed fund will cost more in the long run than its ETF equivalent it will outperform a lower cost ETF buying strategy that isn’t executed at all.
Engineer your freedom
References
Hendricks, K, 2018, What causes loss aversion?, kenthendricks.com, available from: <https://kenthendricks.com/loss-aversion/>
Vanguard, 2021, Vanguard Index Australian Shares Fund, Vanguard Investments Australia, available from: <https://www.vanguard.com.au/personal/products/en/detail/8129/Overview>
Vanguard, 2021, Vanguard Index Australian Shares Index ETF (VAS), Vanguard Investments Australia, available from: <https://www.vanguard.com.au/personal/products/en/detail/8205/Overview>