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Comparison of the efficiency of ETFs and actively managed funds

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What is an ETF?

An exchange-traded fund (ETF) is often referred to as a passive fund. Unlike active investment strategies, an ETF tracks a specific index, such as the DAX. To achieve this, the ETF acquires the shares of the companies listed in the respective stock market index. In the case of the DAX, the capital is invested in the 40 largest and most actively traded companies on the Frankfurt Stock Exchange. As a result, the ETF reflects the fluctuations of the underlying index.

What is an actively managed fund?

An actively managed fund is led by a professional fund manager who follows a specific investment strategy. Through comprehensive market analysis and the examination of individual securities, the fund manager makes informed decisions to increase the fund's value. They have access to a wide range of securities, which they can buy or sell depending on market developments. The primary objective of an actively managed fund is to achieve superior performance compared to the prevailing market.

A key difference between ETFs and actively managed funds is that in an actively managed fund, the fund manager makes the investment decisions regarding securities or real assets. This results in less transparency for investors. Actively managed funds can encompass various categories, including equity funds, bond funds, real estate funds, or commodity funds. Through targeted strategies, the fund manager aims to achieve a return that exceeds that of the respective market.

In contrast, a passive ETF is based on index replication, which reflects the performance of the underlying index. The index, which acts as the underlying asset, influences the value of the ETF. If the price of this underlying asset rises, the value of the ETF also increases, which benefits investors. The different types of ETFs include:

Equity ETFs
Bond ETFs
Precious metal ETFs
Real estate ETFs
Commodity ETFs
Niche products such as money market ETFs and money market ETFs

Costs as the key difference between ETFs and funds

A key aspect that distinguishes ETFs from traditional funds is cost. Exchange-traded funds (ETFs) have significantly lower overall costs compared to actively managed funds. While investors do have to pay fees for the license to replicate the index, as well as custody fees, actively managed funds incur higher costs. These include, among other things, management fees, potentially a performance fee based on certain returns, and costs for the safekeeping of the fund's assets. Furthermore, a sales charge is levied when purchasing fund units, which is typically around five percent of the investment amount. Additional transaction costs also arise during trading.

The costs for actively managed funds typically range between 1.5 and 2.5 percent, while the costs for ETFs average between 0.05 and 1.0 percent.

Fees significantly reduce returns

Costs play a crucial role in returns. Let's assume both the ETF and the actively managed fund achieve a return of five percent. After deducting the average fees of 2.0 percent for fund management and 0.5 percent for the ETF, the remaining return amounts to 3.0 percent and 4.5 percent, respectively.

Considering a one-time investment of 10,000 euros over a period of five years, with constant returns and costs, the capital would develop as follows:

Year	ETF	Actively managed fund
After 1 year	10,450 euros	10,300 euros
After 2 years	10,920 euros	10,609 euros
After 3 years	11,411 euros	10,927 euros
After 4 years	11,925 euros	11,255 euros
After 5 years	12,461 euros	11,592 euros

Although returns vary between the two investment options, this example vividly illustrates how strongly fees can influence the development of assets.

Conclusion: Actively managed funds or ETFs – which option is more advantageous?

Actively managed funds and ETFs share both similarities and significant differences. Exchange-traded funds (ETFs) are particularly known for their low costs and high transparency, which can make this investment vehicle very attractive. In contrast, actively managed funds charge higher fees, which can significantly impact returns. Nevertheless, some funds manage to significantly outperform the market.

In a favorable market environment, ETFs can be more advantageous than actively managed funds due to their lower fees. On the other hand, there are funds that significantly outperform the market, making the higher costs less of a concern.

There's no single right answer to whether ETFs or funds are the better choice. Investors should consider ratings, performance history, and other key figures to compare both investment options. However, it's important to remember that these indicators only provide clues – past performance is not indicative of future results.

The decision of whether to invest in an actively managed fund or ETFs depends on various factors, including your personal preferences. Our advisors at Badent & Klemm Consulting are always available to help you find the optimal investment for your individual situation.