ETFs versus managed funds
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This paper examines the key differences between traditional, actively managed funds (managed funds) and exchange-traded funds (ETFs), and highlights how these differences can affect investors.

Risk diversification

A key benefit of ETFs is the diversification they provide. ETFs typically aim to track an index that serves as a benchmark for an entire sharemarket, or a market sector.

For instance, BetaShares Australia 200 ETF (ASX Code: A200) gives an investor exposure to the top 200 companies on the Australian sharemarket by market capitalisation, in a single trade.

This diversification means that the risk for an investor in an ETF is significantly lower than investing in a single stock.

In the case of actively managed funds, the fund manager selects which stocks to invest in. While the manager typically will invest in a portfolio of stocks, in some cases a fund may have a significantly concentrated exposure, increasing the risk position from an investor's perspective.

Expenses and fees

The cost differential between managed funds and ETFs is arguably one of the primary reasons for the growing popularity of ETFs.

Managed funds typically charge significantly higher fees than ETFs offering similar exposure. In addition, some managed funds charge investors 'performance fees' when their performance exceeds a nominated benchmark.

By comparison, most ETFs charge a simple management fee and no performance fees.

The management fees for BetaShares' broad market Australian shares ETF (A200), for instance, are only 0.07% p.a. — whereas managed funds providing exposure to Australian shares typically charge fees of around 1.55% p.a.

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