ETFs vs Managed Funds - The Tradeoffs between Structures

Dimensional has launched three of its existing funds as dual access funds, enabling investors to access these strategies on-market as exchange traded funds (ETFs) or off-market as unlisted managed funds. The introduction of Dimensional ETFs via a dual access structure provides investors with greater flexibility in how they access Dimensional’s time-tested, systematic investment approach.

In this article we highlight the key differences and tradeoffs advisers can consider for their clients in choosing between the ETF access point and the off-market access point for Dimensional’s funds. We also describe in more detail how the dual access fund structure enables investors to convert from one access point to another.

The dual access structure allows investors to access the same unit class of a fund via an on-market access point (by trading on the stock exchange as an ETF) or via an off-market access point (by trading directly with Dimensional or via a wrap platform as an unlisted managed fund). For simplicity’s sake, we’ll call these the ETF access point and the unlisted access point in this article. As the ETF and unlisted access points facilitate investment in the same fund, the management fees and distributions are applied consistently to investors across both access points.

The dual access structure provides flexibility for advisers, allowing them to choose an access point based on their business needs and the preferences of their clients. Through a process called conversion, investors can change between access points—another major benefit of the dual structure. This unique feature creates optionality for investors and does not require units to be sold or purchased, which means investors do not spend time out of the market or incur a potential capital gains tax liability. (Please refer to the PDS and the Conversion Guide for the Funds for additional details on conversions.)

The tradeoffs associated with transacting via the two access points are outlined in the following section.

There are differences between the ETF access point and the unlisted access point, which may lead to advisers choosing one access point over the other for a dual access fund. What remains the same, however, is the underlying investment strategy. We retain the same implementation benefits of a daily, flexible approach targeting higher expected returns, irrespective of access point. 

Some differences we outline below include how units are bought and sold, how prices are set, and the types of costs to investors that advisers should consider.

How are units traded and what price do investors pay or receive?

Units in unlisted managed funds are bought and sold directly with the fund manager or via an investor service like a wrap platform. Units are bought and sold at the fund’s net asset value (NAV), plus or minus a buy/-sell spread. The NAV is calculated by the fund accountant and reflects the prices of the underlying securities at the close of trading for the day. Since the NAV is based on prices at the close of the trading day, NAVs typically aren’t released until the next business day, at which point investors will find out the price and number of units they have transacted. The buy-sell spread for Dimensional’s funds is reported on Dimensional’s website and so is generally known by investors before they trade.¹ Dimensional’s funds also have a cut-off of 2 pm (Sydney time on a business day) by which time trades must be submitted in order to receive that day’s NAV.

ETFs, however, are traded on a stock exchange and can be bought and sold throughout the trading day at the prevailing market price. Market prices may trade at a premium or discount to NAV and will include a spread between the bid and the ask price. A market maker is appointed to mitigate the risk of the fund trading away from the fair value of the underlying securities; however, advisers still need to be cognisant of how they trade to reduce the chance of poor execution and wide spreads for their clients. Because ETFs trade on a market, investors know the price of their units and how many units they’ve bought immediately after making a trade. Furthermore, ETFs can be traded any time the market is open, which in Australia is from 10 am to 4 pm Sydney time. Because ETFs are priced instantaneously, rebalance trades can be made (selling one asset to buy another) with minimal time out of the market.²

Summary:

• ETF pricing and quantity traded is known immediately after trade execution, whereas unlisted managed fund pricing and quantity traded is not known until the following business day. This immediate pricing helps ETFs trade smoothly, especially with rebalance trades not leading to time out of the market for investors.
  
  
• Unlisted managed funds can be traded with a known spread to NAV, whereas ETF spreads can change.
  
  
• ETF trades can be executed throughout the trading day, while unlisted managed funds have a cut-off of 2 pm (Sydney time on a business day) to receive that business day’s NAV.
  

Platforms

Many advisers who invest clients’ money in unlisted managed funds make use of investor services such as wrap platforms or master-trusts to facilitate their investment. These platforms typically also enable investments in ETFs. Many advisers use platforms as a single view of a client’s portfolio with integrated reporting.

Unlisted managed funds can also accept investments directly from investors; however, this often requires paper forms to be filled out, or the investment manager to offer a dedicated online service (such as Dimensional’s Investment Portal. There may be limited integration between these direct investment options and advisers’ other systems, such as planning tools.

ETFs can be held directly in an investor’s name at a brokerage. The ability to hold investments at a broker is unique to ETFs and other listed securities. These are often able to be integrated into advisers’ planning tools.

Summary:

• The dual access structure affords the flexibility for investors to hold units at a wrap platform, directly with the issuer, or at a brokerage.
  
  
• ETFs can be held at a wrap platform or at a brokerage. Managed funds tend to be accessed via wrap platforms, although they can be held directly with the issuer.

Cost structures

In assessing the costs of investing in ETFs vs. managed funds, it’s useful to consider the types of direct and indirect costs investors face and the timing of when these costs are incurred.

The ETF market overall tends to have lower management fees than the managed fund market, and this is largely driven by index funds being the predominant ETF investment strategy. Dimensional’s funds are active strategies designed to outperform indices by targeting higher expected return securities through a daily process that adds value beyond a strategy that is rigidly tied to an index. The dual access funds Dimensional has launched are all priced within the lowest quartile compared to peers.³ Under the dual access structure, both access points incur the same management fees, so for investors in Dimensional’s funds, there will be no difference in management fees between the ETF and unlisted access points.

Costs to buy and sell units will differ as discussed above—ETF investors will incur a spread based on a market price, while managed fund investors will pay a buy/sell spread predetermined by the issuer.

There are also typically different cost structures for the platforms and brokers who facilitate the trading of units. Typically brokers charge a brokerage fee to buy or sell ETF units; however, there is typically no ongoing fee associated with holding ETF units at the brokerage platform. Conversely, for wrap platforms where advisers often trade and hold managed funds for their clients, there typically are no fees to trade a managed fund, but there is an ongoing fee to have units custodied at the platform.

Summary:

• Holding managed funds or ETFs at wrap platforms incurs ongoing AUM-based fees to clients. Holding ETFs at a brokerage typically incurs no ongoing fees.
  
  
• Trading ETFs typically incurs brokerage fees for clients (both at wrap platforms and brokerage platforms). There are usually no fees for trading in unlisted funds.
  
  
• Dimensional’s dual access funds are well priced compared to peers. Investors across both access points pay the same management fees.
  

Other differences which can matter to advisers and their clients

There are a number of other differences between ETFs and unlisted managed funds which may matter to advisers and their clients.

Some clients may be more familiar and comfortable with using one structure over another. ETFs have become a well-known structure for Australian investors, especially younger investors (according to a 2023 ASX study, young investors are roughly three times as likely to own ETFs than unlisted managed funds³ ). However, unlisted managed funds still have significantly more assets under management compared to ETFs, with unlisted managed funds roughly 5.5x the size of the ETF market in Australia.⁴

ETFs do not support fractional units (investors can only buy or sell in multiples of one unit), whereas unlisted funds do allow investors to purchase or sell down to a small fraction of a unit. This may mean advisers can be slightly more precise when sizing trades toward a target allocation, but for most clients this should not be material.⁵  Fractional units also lead to minor differences in distributions for the ETF access point and unlisted access point; however,  the distribution amount and reinvestment price remain the same for both access points.⁶

Historically, most ETFs have been index funds with holdings published each day. Conversely, many unlisted managed funds have extended publication periods to release holdings. Some investors may prefer the transparency of daily holdings being published. Dimensional’s dual access funds will offer the transparency of daily holdings, and this will apply equally to the ETF access point and the unlisted access point.

The dual access structure Dimensional is adopting will give advisers more choice and flexibility. Alongside the existing unlisted access point, the structure opens an ETF access point which will provide advisers and their clients more flexibility about where they choose to hold and trade their units. Further, advisers will have optionality in choosing whether to use this new access point by converting their units at a time in the future which suits them. Nothing will change for advisers and their clients who decide they do not want to convert to using the ETF access point—they can continue to use the existing unlisted access point. This is the continued evolution of Dimensional offering our systematic investment strategies in the investment wrappers which best suit our clients.