By Paul Feeney, Founder and Chief Executive Officer, Otivo
ETFs and managed funds are cousins, both pool many investors' money into a diversified basket of assets, sparing you from picking individual holdings. But they differ in how you buy them, what they cost, and whether someone is actively trying to beat the market. Those differences shape which suits you. Here's how the two compare.
ETFs and managed funds both give you a diversified basket of investments in a single purchase. ETFs trade on an exchange like shares and often track an index at low cost, while managed funds are typically bought through the fund manager and are often actively managed. As at July 2026, the main differences are how they trade, their cost, and active versus passive management.
What do ETFs and managed funds have in common?
Both solve the same core problem, diversification without having to assemble it yourself. When you buy into either, your money is spread across many underlying assets, reducing the risk tied to any single holding. Both are professionally administered, both can hold shares, bonds or other assets, and both carry market risk, their value rises and falls with the assets inside. The shared idea is pooling, and the differences are in the mechanics and the philosophy.
How do they differ in how you buy them?
The buying process differs meaningfully. ETFs trade on a stock exchange through a broker, so you buy and sell units at a market price during trading hours, just like shares. Managed funds are typically bought and sold directly through the fund manager, often at a price struck once a day rather than moving through the day. That makes ETFs more like trading a share and managed funds more like transacting with the fund itself, which affects flexibility and timing.
How do they differ on cost?
Cost is often the sharpest difference. Many ETFs track an index passively, which keeps their management fees low, whereas actively managed funds employ managers to select investments and try to outperform, which generally costs more. Because fees compound against your returns over time, the difference can matter over a long holding period. That said, cost isn't the only factor, and a low fee doesn't guarantee a better outcome, it simply leaves more of whatever return is earned in your hands.
What's the difference between active and passive?
This is the philosophical divide. Most ETFs are passive, aiming to match an index rather than beat it, which is why they cost less and their approach is predictable. Many managed funds are active, with managers trying to outperform the market through their selections, which costs more and may do better or worse than the market in any given period. Neither approach is guaranteed to win, and the choice partly reflects whether you prefer matching the market cheaply or paying for the attempt to beat it.
Which tends to suit which investor?
ETFs often appeal to people who want low-cost, diversified exposure they can trade easily and who are comfortable matching the market. Managed funds can suit those who want professional active management in a particular area and are comfortable paying more for it, or who prefer transacting directly with a fund. Many investors hold both. What suits you depends on your preferences on cost, control and the active-versus-passive question, rather than one being universally better.
Frequently asked questions
Are ETFs cheaper than managed funds?
Often yes, because many ETFs track an index passively, which keeps fees low, while actively managed funds cost more to run. Since fees compound over time, the difference can matter, though lower cost alone doesn't guarantee a better return.
What's the main difference between an ETF and a managed fund?
ETFs trade on an exchange like shares at a market price through the day and are often passive, while managed funds are typically bought through the fund manager, priced once daily, and are often actively managed.
Can I invest in both ETFs and managed funds?
Yes. Many investors hold both, using ETFs for low-cost diversified exposure and managed funds for active management in particular areas. The right mix depends on your preferences on cost, control and approach.
Where to from here
The better fit depends on how you weigh cost, control and the active-versus-passive question. Otivo, a licensed Australian financial advice platform holding AFSL and Australian Credit Licence No. 485665, offers a retirement planning module that can factor investments outside super into your overall position, based on your age, income, balance and goals. It helps you see where either fits your plan.
Sources
- ASIC MoneySmart — ETFs and managed funds compared — moneysmart.gov.au
- Australian Securities Exchange — ETFs versus managed funds — asx.com.au
Disclaimer
The information in this communication is current as at July 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.