Managed Funds or Exchange Traded Funds – What is better?
If you want to invest money on the stock exchange, you can do so directly. You buy a share or a bond and then have this security in your custody account. Who would like to acquire several or very many single Investments, this can do with actively managed funds or so-called ETFs.
Since many newcomers also read here, I would like to go into detail in a series of articles about what an ETF is and which advantages and disadvantages one has with these investment instruments. In the first part, we learn what an ETF is and the difference to an actively managed fund.
Actively managed funds
An actively managed fund buys several dozen shares or bonds and manages them in a fund. Investors can now purchase fund units. The fund shares sometimes cost 5 to 6% so-called issue surcharge. Therefore it is very advisable to look around at cheaper direct banks. Often then only half the price for the issue surcharge results, sometimes this is omitted occasionally – for example with discount actions – or even completely.
Actively managed funds collect an annual fee (TER = Total Expense Ratio) of between 1.2 and almost 2.5% and have to measure themselves against a benchmark. The result was that around 90% of fund managers throughout several years were unable to outperform their benchmark.
Especially when investors want to track an index, the question of what added value a fund manager can offer is rightly raised. For example, if someone wants to track the German DAX share index or the North American S&P 500, the composition of the index is known to everyone. No expensive people are needed and simple investment constructs are sufficient.
In the past, so-called index certificates were popular. With the certificate, one could participate 1:1 in the development of the respective underlying index. However, all certificates have a rather unlikely but significant disadvantage. If the issuer of the certificate is insolvent, then in the standard case the money invested in the certificate is lost. A prominent example were the investors in the Lehmann certificates, who still hope for their money in the financial crisis with the bankruptcy of the bank.
In comparison to certificates, money invested in funds and ETFs is special assets. This means that if the respective financial institution of the fund or ETF provider goes bankrupt, the capital is protected from access by creditors and, as a rule, another provider takes over the investment funds. The insolvency of an issuer is quite unlikely, but you should take this risk into account when making investment decisions and not invest too much money in certificates.
ETF (Exchange Traded Fund)
For some years now, new low-cost but at the same time, safe investment instruments (regarding investor protection in the event of the issuer’s insolvency) have been gaining ground. An ETF is an exchange-traded fund designed to be traded on the stock exchange. Conventional funds are otherwise often marketed by the fund company with the above-mentioned front-end load. In contrast to funds, ETFs do not have an initial sales charge, and only the fees customary on the stock markets are due.
ETFs belong to the so-called “passive” investment funds, which are characterized above all by a more favorable fee structure than actively managed investment funds. For example, ETFs that track a known and liquid index cost significantly less than 0.5%. ETFs can be scanned with the stock screener Trade Ideas Review. Do not miss the opportunity to enjoy savings of up to 25% off with the Trade Ideas promo code.
In the meantime, however, some hybrid forms of ETFs have developed in which there is a certain activity in the composition of the securities. Some ETFs, for example, also cost an annual fee of 1%. In the case of the ETFs presented here on this blog, I will point out in the standard case if the TER is higher than usual. Ultimately, every investor must decide for himself whether the higher investment costs are worth it.
In the standard case, however, ETFs are passive. Passively managed means that the selection of the securities in the fund is not made by subjective valuations by the fund manager, but merely replicates the composition of a certain index, such as the German DAX share index. The fact that the capital invested in ETFs is also regarded as a special fund – as is the case with other investment funds has already been discussed above. This means that if the ETF issuer becomes insolvent, the capital is not lost.
ETFs are gaining more and more market share when investing money, but in recent years it has been noticed that even direct banks and stock market magazines have found it difficult to report on ETFs. The more expensive active funds are of course financially more attractive to sell to investors than the very cheap ETFs. This can still be felt today.