COMPARINGETFs

ETFs are just one of many investment options available. Picking the right investment tool can sometimes feel overwhelming. This series highlights how ETFs could offer a better way to invest your wealth and help your financial future. In this series, you’ll learn about the essential benefits and costs of ETFs compared specifically to managed funds and insights on why some people either invest in ETFs or hold onto cold hard cash.

Comparing ETFs
ETFs vs managed funds
2 min

ETFs vs managed funds

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.

First thing to remember

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.

Comparing ETFs, managed funds and stocks

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.

Benefits Actively Managed Fund ETFs Stocks
Diversified

Many stocks or bonds in a single fund

Traded on Exchange

Throughout the trading day

Intraday Pricing

Live pricing throughout the course of the trading day

Traded Throughout Trading Day

Buy and sell during market hours

Management Fees

Annual cost of a professionally managed fund

Transaction Fees

Costs associated with buying or selling (e.g., managed fund sales loads, brokerage commission fees)

Tax Efficient2

Generally have fewer unplanned capital gains distributions

Index Tracking

Seek to track the return of a market index

ETFs or managed funds?

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.

Next up:ETFs vs Cash

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ETFs vs Cash
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ETFs vs Cash

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?

What cash can and can’t do 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.

Comparing ETFs and cash

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.

Categorize your cash

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:

Categorize your cash

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.

Expected yield on cash vs ETFs

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.

Average yield for cash equivalents and short duration bond ETFs

Expected yield on cash vs ETFs

*This graph is for illustrative purpose only

Source

  1. Monetary Authority of Singapore, as of Jun 2019. Figures refer to average rates compiled from that quoted by 10 leading banks and finance companies.
  2. Based on 1-yr total return %. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted.

Cash is great but make it work harder for you

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.

Points to take away

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.

  1. No investment option is better than the other
  2. Decide on investments to meet your needs
  3. Make your money work harder for you

Sources

  1. Morningstar, as of 12/31/18. Comparison is between the average Prospectus Net Expense Ratio for the iShares ETFs (0.34%) and active open-end mutual funds (0.96%).
  2. This does not take into account your personal circumstances nor constitute tax advice.
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Comparing ETFs

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8 mins

Choosing the right ETFs

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