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In Australia vanguard offers the LifeStrategy® Balanced Fund (a blend of bonds, shares and so on), it has a management fee of 0.9% per year for the first 50,000$, 0.6% for up to 100,000$ and 0.29% onward. The buy/sell spread cost is 0.1%.

However one can also buy the ETF equivalent, VDBA which has a management fee of 0.27% per year, the buy/sell spread would be whatever your broker charges you.

The first question is, why is this? if the ETF is effectively the same as investing into the fund, why would the fee be so different? It is true that with a buy/sell spread of 0.1% one can invest tiny amounts of money (the minimum additional investment is 100$) over time, having a dollar-average strategy, while with a broker you will easily be charged 10$ per operation.

The second question is, what am I missing here?

  • I have not seen this kind of pricing for mutual fund in USA, so added country tag australia – Neil Aug 26 at 16:49
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With an ETF, you're trading shares that already exist. If the value starts to drift away from net asset value, the authorized participant will step in to create or destroy shares. The management doesn't have to do anything as a result of your choice to buy or sell.

In a traditional mutual fund, when you buy the management has to go invest that money. When you sell, the management has to sell assets to raise the money to pay you. Even considering that all transactions on the same day get combined, that's still management having to actively buy and sell the fund components every single trading day.

Guess which one is more expensive.

  • But how is that 3 times more expensive? (0.26% vs 0.9%) also when you buy into a managed fund, you buy "units" of it, which ultimately are tiny fractions (not exactly a share, but almost a share). The question remains, (1)how is it 3 times more expensive and (2) is there any other benefit I am missing here? – Juan Antonio Gomez Moriano Aug 27 at 0:35
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    @JuanAntonioGomezMoriano: The expenses I mentioned do not exist at all for ETFs. If they represent 2/3rds of the mutual fund expenses, then the result is an ETF that's 1/3rd the cost of the mutual fund. – Ben Voigt Sep 8 at 23:58
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From an interview on a finance podcast with a Senior Key Account Manager at Vanguard, he explains that the administrative and reporting requirements of unlisted managed funds are far above those required by the ASX, hence the additional costs.

Podcast was Aussie Firebug and the comment occurs around the 19:00 mark.

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