ETF or Fund? The Wrong Question.

“ETF or mutual fund?” sounds a bit like “espresso or coffee?” After all, every ETF is a mutual fund – but by no means is every mutual fund an ETF. What matters, therefore, is not so much the label as the role a product is intended to fulfill in your portfolio.

The real question: passive or active?

From a legal perspective, too, an ETF is an investment fund – in Europe, it is usually a UCITS fund, just like many actively managed funds. The difference therefore lies not in the label, but in the investment strategy and in trading via the stock exchange.

By the way: UCITS stands for ‘Undertakings for Collective Investment in Transferable Securities’. This refers to funds that are subject to strict EU regulations: they must be broadly diversified, are subject to regulatory supervision, and investors’ money is held separately from the fund company’s assets.

Most ETFs track an index. The question ‘ETF or fund?’ therefore usually means something else: do I want to track a market index as cost-effectively as possible – or deliberately deviate from it? That is the decision we are discussing here.

1. “I just want to participate in the market.”

Investing in a broadly diversified, transparent, and cost-effective manner: An ETF can be well-suited for this. It generally tracks an index and does not attempt to predict individual winners.

This has advantages: Ongoing costs are usually low, the composition is transparent, and ETFs can be traded throughout the trading day. In return, investors take the market as it is – with all its heavyweights, excesses, and setbacks.

2. “I don’t want to buy everything that’s big in the index.”

An index automatically buys what’s big – regardless of whether a company is currently undervalued or overvalued, whether its business model is sound, or whether risks loom. Active management deliberately takes a different approach: Experienced fund managers carefully analyze companies – business model, balance sheet, valuation, and sustainability – and decide, stock by stock, what goes into the portfolio and what doesn’t.

Instead of rigidly tracking an index, a team of experts works on your behalf. They can prioritize different sectors than the market, strategically reduce risks, and respond to changes. This is particularly valuable when an index is heavily weighted toward a few large stocks or when markets are less efficient. As with any investment, it’s worth considering costs and long-term results.

3. “I want both.”

Many investment portfolios don’t have to choose between ETFs and actively managed funds at all. A broadly diversified ETF can form the cost-effective core. Actively managed funds are added strategically where stock selection and risk management are particularly important.

By the way, ETFs also make decisions – just earlier: based on the rules of their index. The index determines which companies are included, how they are weighted, and whether sustainability criteria apply. For example, the ERSTE ETFs each track approximately 250 large companies from developed markets or the U.S., respectively, and already incorporate sustainability into the index construction.

How We Use ETFs

Even as active managers, we use ETFs in asset management and fund-of-funds management. Whether they are used depends on the respective market, the investment strategy, and the current situation.

• Market Access: An ETF allows you to gain exposure to a market, a region, or a sector in a single step. At the same time, the ETF follows the rules of its index – regardless of how individual companies are valued.
• Tactical Adjustments: If a region needs to be weighted more heavily or less heavily, this can be implemented quickly using ETFs. However, this also means that the performance of the respective market or index will affect the portfolio – in either direction.
• Cost-efficiency: In broad, highly efficient markets, an ETF can be the most cost-effective way to invest. However, lower costs do not automatically mean better performance.
• Trading: Since ETFs are traded on the stock exchange, positions can be built up and reduced flexibly. Prices may fluctuate and deviate from the value of the underlying securities.

The decision regarding which market to weight, when, and by how much remains an active one. The ETF is the tool, not the strategy.

At a Glance

What matters to me is…	More likely an ETF	More likely an actively managed fund
Low ongoing costs	✓
As accurate a replication of an index as possible	✓
Trading during the trading day	✓
Broad diversification	✓	✓
Targeted security selection		✓
Deliberate deviation from the index		✓
Active risk management by fund managers		✓

Not a Matter of Faith

Choosing between an ETF and an actively managed fund is not a matter of faith. Good portfolios aren’t built on dogmatic thinking, but on the right combination of costs, opportunities, risks, and investment objectives. So the better question isn’t “Which one wins?” but rather: “What role should this product play in my portfolio?”

 

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the fund prospectus or the Information for Investors pursuant to Art 21 AIFMG and the key information document are available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

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Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

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