Like managed funds, ETFs are baskets of stocks and assets. There are quite a few differences though. While managed funds may offer returns that meet your investment goals, in most cases you can’t buy and sell them whenever you want. ETFs however act similarly to stocks so you can buy and sell them anytime during market hours. Let’s look into how each investment tool matches up to your actual need.
Don’t assume one is better than the other. ETFs and managed funds each have pros and cons. Mapping your needs to the benefits of each will help you make the right decision for your needs.
ETFs may be a good option if you’re looking for exposure to a specific market. Often with lower management fees1, ETFs can be traded on the stock exchange and are an alternative to managed funds.
But, despite being flexible, they may not always be the solution to your investment needs. An actively managed fund can be used for investment strategies in complex and opaque markets that may be difficult to access using other investment options. Another reason actively managed funds may be your choice of investment is if you need someone to help you make specific investments to generate above-market returns.
It can be hard to compare the differences and similarities of active managed funds, ETFs and stocks – so we’ve done it for you.
ETFs can be a great addition to your portfolio if you already hold managed funds. On the other hand, if you’re new to investing, ETFs can be a great starter kit given their flexibility and instant exposure to a multitude of stocks.
Compared to managed funds, they are simpler, more cost-effective and can generally be lower risk. They offer immediate visibility and flexibility as you can trade at any time during trading hours. If you already hold managed funds, ETFs can be a great addition to your portfolio, as they can offer potentially more predictable returns.
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We work hard for our money, and so, naturally we want to protect it. Once it’s in our bank account, we want to keep it safe and secure without the risk of losing it through investments. Even renowned investors like Warren Buffet swear by holding onto cash for a rainy day. But how much cash do you need and do you in fact have excess cash that could be working harder for you?
We all need cash. But stashing all of your cash is not necessarily a long-term solution to protecting your wealth, especially when inflation rises. When prices go up even at a steady pace over the long term, the value of your cash declines. The result? Reduced spending power and net wealth.
Saving your cash and investing in ETFs play different roles in an investment strategy. Investors sometimes advocate for keeping cash on hand; however it is only through investments that you have the opportunity to potentially make your cash work harder for you. ETFs are a great low cost, transparent and flexible investment tool.
One way to better protect your cash and make it work harder for you is to segment it. Think about categorizing your cash into the minimum you project you need for the below periods of time:
Longer-term segments allow you to explore putting cash into different savings or investments with appropriate levels of risk. Assets like high rated bonds and government securities that may be relatively low risk are not always easily available to regular investors, but ETFs can provide that access and is one of the avenues you can look into, when thinking of investing excess cash.
The purchasing power of cash can decrease as inflation eats away at it over time. What’s the difference in yield for cash compared to short duration bond ETFs
As you’ll see in the table below, short duration bond ETFs, have the potential to add more income to meet your investment goals.
*This graph is for illustrative purpose only
Source
You’ll always need cash in hand, but categorizing your cash can help identify what excess cash you have to invest with, opening up new possibilities. Investing your cash into ETFs can help grow your wealth at the same time, while giving you the option of flexible trading and immediate visibility. Investing in ETFs may allow you to have the potential to meet your short or long-term financial goals quicker than if you were to hold onto cold hard cash.
In summary, there is no one size fits all investment strategy and there are many pros and cons to every investment tool. However, when looking to grow your wealth, ETFs are worth looking into.
Sources
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Choosing the right ETFs
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