Cristiano Ronaldo or Leo Messi? Barça or Real Madrid? Both are perfect football similes to what could be the million-dollar question in the world of investment. And you, Are you more passive management or active management?
We have already analyzed in different posts investment vehicles typical of active management and passive management, although in this post we will do something different. Let's go in depth and compare two products that we consider very interesting for channel savings and that not because of their differences are they incompatible, but rather the opposite.
Key points to compare them
We will rely on four key points to compare them: profitability, costs, diversification and taxation.
- Cost effectiveness: is without a doubt the characteristic harder to compare And as the saying goes, “gone water moves no mills.” Therefore, it is no coincidence that one of the most repeated phrases when talking about this topic is “past returns do not ensure future returns.”
We can find both actively managed investment funds and ETFs with magnificent performances and others that have not obtained such brilliant historical returns. Each fund is different and the returns can vary substantially from one year to the next.
Taking all this into account We cannot choose one or the other. in terms of profitability.
- Cost: Passive management is, as a general rule, much cheaper than active management. This fact is mainly explained because the passive management It does not need a management team to analyze values and build portfolios, since as we have commented on several occasions it is indexed to an index.
Pay low commissions by our portfolio helps to generate long-term profitability, since, let's not forget, the commissions will be paid regardless of the profitability achieved by the investment vehicle we have selected.
At this point there is a clear winner and they are ETFs.
- Diversification: It is a key characteristic when investing in investment funds or ETFs since it is one of the main advantages offered to savers whose capital would not allow a high degree of diversification without commissions seriously hindering its profitability.
The ETFs diversify on a sector, raw material or geographic market (we can find them on the MSCI World, an index made on the world economy), although we can also find investment funds composed of securities from the same sector, an economy or global ones.
Seen this way, diversification depends more on the investor's selection of the ETF or investment fund than on what kind of vehicle they are choosing, so There is no clear winner in this category.
- Taxation: perhaps we are facing one of the more unknown aspects and probably more undervalued by most traditional investors.
Taxation is very different between investment funds and ETFs And we must not forget that the latter are listed on the equity market as if they were a listed stock. This will be the key factor that will make the difference between both vehicles as far as taxation is concerned.
Investment funds have a peculiarity that makes them very interesting for long-term investments and that is that It is only taxed when the shares are redeemed.. In this way the transfer between investment funds is exempt from taxation, being able to change our savings from one fund to another depending on what we consider most appropriate at any given time without having to pay taxes on latent capital gains. Thus, the latent capital gains will be able to continue generating additional capital gains without having to pay taxes on them until we make our refund.
In the case of ETFs, when they are listed on a market as if they were a stock, they have the same tax treatment as these. That is why the taxation of the capital gains that we have obtained must be carried out at the time of sale even though we immediately afterwards purchase another ETF, since unlike investment funds there is no concept of “transfer”. .
This tax advantage of investment funds means that the point corresponding to this category goes to them except in a specific case, and it is the one that affects legal entities since the tax advantage is only intended for natural persons.
In the case of the legal entities there is no possibility of transfer between funds, being necessary to carry out the reimbursement of the first fund in order to acquire the shares of the new fund that one wishes to subscribe to, so in this case the investment funds have the same taxation as the ETFs.
Which one do we opt for?
Once all points analyzed We see how some aspects are in favor of ETFs while others are in favor of investment funds.
That is why we should not understand ETFs and investment funds as two exclusive products, but in many cases complementary. Depending on our investment objectives, our time horizon and our investment profile, we will form a portfolio in which both active management and passive management will probably be present.
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