Exchange-traded funds, or ETFs, are open-ended investment funds that you can buy and sell on an exchange via online brokers or financial advisers, just like stocks. ETFs can be bought and sold throughout the trading day.
Upon purchasing an ETF, investors acquire units in the fund, thereby gaining exposure to the underlying assets in which the ETF invests, rather than holding the underlying securities directly.
Some of the potential benefits of investing in ETFs are:
As with any investment, ETFs carry risk and that risk will vary depending on the ETF you choose to invest in. As a result, it's important to do your homework to understand the underlying asset class and strategy of any ETF you're considering to ensure it aligns with your goals and risk tolerance. Australian investors should always consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) before investing in both managed funds and ETFs.
If you need help understanding your investment options and the potential benefits and risks of an ETF for your portfolio, we recommend contacting your financial adviser.
ETFs can be managed in two ways: actively or passively. Passive ETFs aim to replicate the performance of a specific index, benchmark, sector or commodity.
Active ETFs are managed by investment professionals who seek to outperform a benchmark or achieve specific investment objectives. Active ETFs give investors access to expert portfolio managers, enabling them to build portfolios in ways that align with their individual goals and risk tolerance.
Many active equity funds have underperformed their passive counterparts over the past decade, leading to a preference for passive equity investments—and passive equity ETFs. However, the story is different for bonds when comparing performance between active and passive approaches.
Because bond markets and bond indexes are larger and less efficient than their equity peers, active management has a better chance of delivering index-beating returns in fixed income. In fact, 85% of active fixed income funds (including active ETFs) outperformed their passive peers, net of fees, over the last 10 years, compared to 40% of active equity funds. (Source: PIMCO and Morningstar as of 31 December 2024).
Unlike the majority of passive ETFs, active ETFs can provide access to a team of investment specialists, extensive credit research resources, quantitative analysis and robust risk management expertise. This allows experienced active managers to analyse a wide range of factors when deciding which bonds to buy and sell, which may help active ETFs outperform passive approaches.
Both ETFs and managed funds are managed investment schemes, but the key difference is that ETFs are listed on an exchange. This means, unlike an unlisted managed fund, you can buy and sell ETFs like shares.
Other differences include investment minimums. ETFs typically have lower minimums—sometimes just one unit—while managed funds typically require a higher initial investment.
ETFs also offer live pricing during market hours, providing greater transparency regarding the prices at which you are buying and selling.
Active ETFs may distribute income or capital to investors in the form of distributions, akin to dividends. However, these distributions are not guaranteed and are contingent upon the ETF's performance. Distributions are disbursed to investors similarly to dividends received from shares in a corporation, with variability based on the investment strategy and asset composition of the active ETF, ranging from monthly to annual payment frequencies.
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