Managed Funds vs ETFs: What NZ Retirement Savers Should Know

Here's a scenario many Kiwis face: You've built up a decent KiwiSaver balance, and now you're thinking about investing outside of KiwiSaver to boost your retirement savings. Your mate swears by ETFs because of the low fees. Your financial adviser mentions managed funds with PIE tax advantages. Your cousin just bought some shares directly. So what's actually right for you?

The truth is, both managed funds and ETFs have a place in retirement portfolios, but they work quite differently. The key is understanding how fees, tax treatment, and accessibility align with your specific situation. Let's break down what really matters.

Before we dive into fees and tax, let's clarify what we're talking about. This gets confusing because the terms overlap.

Managed funds are investment portfolios run by professional fund managers. In New Zealand, many (but not all) managed funds are structured as Portfolio Investment Entities, or PIEs. This is a tax structure, not an investment type. When you invest in a PIE fund, the fund manager handles the tax on your behalf at a prescribed investor rate (PIR).

ETFs (Exchange Traded Funds) are investment funds that trade on stock exchanges like individual shares. Some ETFs are also PIE funds, which means they get the same tax treatment as other PIE managed funds. However, many international ETFs available to Kiwi investors are not PIE funds, which creates different tax obligations.

Here's where it gets interesting: You might invest in a managed fund that tracks the same index as an ETF, with nearly identical holdings. The main differences come down to how you buy them, what you pay, and how they're taxed.

Let's talk numbers, because this is where the rubber meets the road for long-term retirement savers.

Managed funds in New Zealand typically charge annual management fees ranging from 0.50% to over 2.00% of your investment balance. Actively managed funds (where fund managers actively pick investments trying to beat the market) sit at the higher end. Index-tracking managed funds tend to be cheaper, often 0.50%-1.00%.

ETFs generally have lower management fees, often between 0.20% and 0.50% annually. Some broad market index ETFs charge even less. For example, a popular NZX-listed ETF tracking the S&P 500 might charge around 0.31% per year.

That percentage point difference compounds powerfully over decades. On a $100,000 investment earning 7% annually before fees, paying 1.5% in fees versus 0.30% in fees could mean a difference of over $140,000 after 30 years. That's real money in retirement.

But here's the catch: fees aren't the whole story. You also need to factor in transaction costs, bid-ask spreads (the difference between buying and selling prices), and for some managed funds, entry or exit fees. With ETFs, you'll pay brokerage fees each time you buy or sell, which can add up if you're investing small amounts regularly.

This is where many New Zealanders find genuine tax advantages, especially if you're in a higher income bracket.

When you invest in a PIE fund (whether it's a traditional managed fund or an ETF structured as a PIE), your investment income is taxed at your Prescribed Investor Rate (PIR). According to the Inland Revenue guidance, your PIR is based on your taxable income over the previous two years, and it's capped at 28%.

Here's why this matters: If you earn over $180,000, you pay 39% tax on income above that threshold. If you earn between $70,001 and $180,000, you pay 33% on income in that range. But investment income from PIE funds? Maxed out at 28%.

For a higher earner, this creates a meaningful tax saving on investment returns. If you're earning $150,000 and your regular tax rate is 33%, you'll pay 5% less tax on PIE fund returns than you would on other types of investment income.

Non-PIE investments (including many international ETFs bought through overseas platforms, or direct share ownership) are taxed differently. You'll generally pay tax at your marginal rate on dividends, and you may face Foreign Investment Fund (FIF) rules for overseas shares, which can get complex quickly.

The FIF rules require you to calculate and pay tax annually on your overseas investments over $50,000, even if you haven't sold anything. This creates administrative work and potential tax bills on unrealized gains.

Beyond fees and tax, how you actually access these investments matters, especially when you're starting out or want to invest regularly.

Managed funds often have minimum investment requirements. Some start at $1,000, others at $5,000 or $10,000. Many allow you to set up automatic regular contributions (like $100 monthly), which is convenient for consistent retirement saving. You typically invest through the fund provider's platform or a financial adviser, and you can usually buy or sell at the fund's unit price, calculated at the end of each business day.

ETFs can be purchased for the price of a single share (sometimes as little as a few dollars), which makes them accessible if you're starting with smaller amounts. However, you'll need a brokerage account with a share trading platform. Brokerage fees typically range from $15 to $30 per trade in New Zealand, which means buying small amounts frequently becomes expensive relative to your investment.

There's also a psychological difference. With managed funds, you're often set-and-forget with automatic contributions. With ETFs, you need to actively log in and make trades, which some people find empowering and others find inconvenient.

Importantly, when you're approaching retirement and thinking about drawdown strategies, the ease of selling portions of your investment matters. Managed funds let you redeem specific dollar amounts. With ETFs, you sell whole shares, which can be less precise.

Let's talk about something that doesn't get enough attention: the actual work involved in managing these investments come tax time.

PIE funds handle tax automatically. The fund calculates and deducts tax at your PIR throughout the year. At tax time, you receive a summary, but there's generally nothing you need to do. The fund has already sorted it with Inland Revenue. This simplicity is genuinely valuable, especially as you approach retirement and want fewer administrative headaches.

Non-PIE ETFs and direct share ownership create more work. You'll need to track your cost basis (what you paid for shares), calculate gains or losses when you sell, handle dividend tax credits, and potentially deal with FIF calculations for overseas investments. Many Kiwis find themselves needing an accountant once their non-PIE investments become substantial, which is an additional cost to factor in.

If you're managing investments while working full-time and trying to enjoy life, the administrative simplicity of PIE funds has real value beyond just the tax rate.

Misconception 1: ETFs are always cheaper. While ETFs often have lower management fees, if you're investing small amounts regularly, brokerage costs can outweigh the fee savings. A managed fund with a 0.75% fee and no transaction costs might cost less than an ETF with a 0.30% fee if you're paying $20 brokerage on $200 monthly investments.

Misconception 2: Managed funds are always actively managed. Many managed funds are passive index trackers, just like most ETFs. The management style (active vs. passive) is separate from the structure (managed fund vs. ETF).

Misconception 3: All ETFs have tax advantages. Only PIE-structured ETFs offer the capped 28% tax rate. Many popular international ETFs available to Kiwi investors are not PIE funds, which means you'll pay tax at your marginal rate and potentially deal with FIF calculations.

Misconception 4: You have to choose one or the other. Many investors use both. You might have managed funds for regular automated investing and tax simplicity, plus some ETFs for specific exposures or when you have lump sums to invest.

Rather than declaring one option superior, it's worth thinking through what actually matters for your specific circumstances. Some factors that often influence this decision include:

• Your income level: Higher earners (especially those over $70,000) may benefit significantly from PIE fund tax treatment.
• Investment amount and frequency: Smaller, regular investments often suit managed funds with automatic contributions. Larger, occasional investments might work better with ETFs to minimize transaction costs relative to the investment.
• Your comfort with DIY investing: ETFs require you to have a brokerage account and make active trade decisions. Some people enjoy this control; others prefer the simplicity of managed funds.
• Time to retirement: As you near retirement, the simplicity of PIE tax reporting and the ease of making specific dollar withdrawals from managed funds can become more valuable.
• Access to advice: If you're working with a financial adviser, they may have preferred platforms that influence which structures are more convenient.

Questions to discuss with a licensed Financial Advice Provider might include: Given my income level, how much tax am I saving with PIE treatment? How do transaction costs affect my specific investment pattern? What's the total cost of ownership for each option in my situation?

Here's the reality: both managed funds and ETFs can work brilliantly for retirement saving, and the best choice often depends on your specific tax situation, investment pattern, and preferences.

For many Kiwi retirement savers, especially those earning above $70,000, PIE-structured investments (whether managed funds or PIE ETFs) offer genuine tax advantages that can outweigh slightly higher fees. The capped 28% tax rate and simplified reporting are powerful benefits.

For hands-on investors with larger sums to invest less frequently, direct ETF purchases might offer cost savings despite transaction fees and more complex tax reporting.

The key is calculating your total cost of ownership, including fees, transaction costs, tax implications, and even the value of your time in managing investments. A slightly higher fee that saves you hours of tax paperwork and provides better tax treatment might be worth it.

Whatever you choose, the most important thing is that you're actually investing for retirement outside of KiwiSaver if you need to. The vehicle matters less than the consistent action of putting money toward your future.

This article is general information only and does not constitute personalised financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.