In New Zealand, the primary difference between Managed Funds and ETFs (Exchange Traded Funds) lies in their trading mechanism. ETFs trade on the NZX stock exchange with real-time pricing, while unlisted managed funds are priced once daily. However, both vehicles often utilize the Portfolio Investment Entity (PIE) structure, capping tax at 28% for Kiwi investors.
The landscape of personal finance in New Zealand has undergone a seismic shift over the last decade. Gone are the days when investing was solely the domain of property owners or high-net-worth individuals using expensive brokers. Today, the battle for your investment portfolio is largely fought between two main contenders: Managed Funds and Exchange Traded Funds (ETFs).
For the average Kiwi investor, distinguishing between “etfs nz” and unlisted managed funds is the first step toward building long-term wealth. While they share the same goal—diversification and growth—the mechanics of how you buy, sell, and are taxed on them differ significantly. This guide provides a deep dive into the nuances of the New Zealand market to help you decide which vehicle suits your financial blueprint.
What are ETFs in the New Zealand Market?
An Exchange Traded Fund (ETF) is a basket of securities—such as shares, bonds, or commodities—that trades on a stock exchange, much like an individual stock. In New Zealand, the dominant provider of locally domiciled ETFs is Smartshares, a subsidiary of the NZX.
When you buy an ETF, you are buying a slice of a specific index. For example, buying a unit of the NZ Top 50 ETF gives you exposure to the 50 largest companies on the New Zealand stock market. Because they are listed on an exchange, their price fluctuates throughout the trading day (10:00 AM to 4:45 PM NZT). This offers high transparency and liquidity, allowing investors to enter or exit positions instantly at the current market price.
Managed Funds vs. ETFs: The Structural Breakdown
While an ETF is a type of managed fund, in New Zealand industry parlance, “Managed Fund” usually refers to unlisted unit trusts. Understanding the structural differences is vital for optimizing your portfolio.
1. Pricing and Liquidity
ETFs: As mentioned, these trade in real-time. If the market dips at 11:00 AM, you can buy at that lower price immediately. However, this requires a buyer and a seller to be present (market depth).
Managed Funds: These are priced once per day, usually at the close of business. When you place an order to buy into a managed fund (like those offered by Milford, Fisher Funds, or via InvestNow), your order is processed at the next calculated unit price. You do not know the exact price you are paying until after the transaction is complete.
2. Minimum Investment
Historically, managed funds required high minimums ($2,000+). However, the rise of platforms like InvestNow and Sharesies has democratized this. Now, you can often invest in managed funds with as little as $50 or even $1. ETFs typically require you to buy whole units, though fractional investing on platforms like Sharesies has removed this barrier for many retail investors.
Tax Differences: PIE, PIR, and FIF Explained
Tax is arguably the most critical factor when choosing between specific ETFs and managed funds in New Zealand. The tax treatment depends heavily on where the fund is domiciled.
The PIE Regime
Most New Zealand-domiciled managed funds and NZ-domiciled ETFs (like Smartshares) are structured as Portfolio Investment Entities (PIEs). This is a massive advantage for high-income earners.
- Capped Tax Rate: Under the PIE regime, tax on investment income is capped at 28%. If your personal income tax rate is 33% or 39%, investing through a PIE fund offers immediate tax arbitrage.
- PIR (Prescribed Investor Rate): You must elect your correct PIR (10.5%, 17.5%, or 28%). If you overpay, you can get a refund; if you underpay, you will owe the IRD.
Foreign Investment Funds (FIF)
If you buy an ETF listed on a US exchange (e.g., buying VOO or VTI via Hatch or Stake), you are subject to the Foreign Investment Fund (FIF) rules once your cost basis exceeds NZD $50,000.
This adds complexity. You must calculate tax using either the Fair Dividend Rate (FDR) or Comparative Value (CV) method. While these foreign ETFs often have lower management fees than NZ counterparts, the tax compliance costs and potential leakage can offset the savings. Conversely, NZ-domiciled funds that invest globally (like Kernel or Smartshares) handle the tax for you within the PIE structure, offering a “set and forget” tax experience.
Platform Showdown: Smartshares vs. Kernel vs. InvestNow
To target the keyword “etfs nz” effectively, we must look at the major providers and aggregators available to Kiwi investors.
Smartshares (The ETF Giant)
Smartshares is the largest issuer of ETFs in NZ. They offer funds covering NZ cash, bonds, property, and global equities.
Pros: Listed on NZX, PIE structure, wide variety.
Cons: Generally higher fees than US equivalents; some funds are just “wrappers” around Vanguard funds with an added fee layer.
Kernel (The Index Fund Challenger)
Technically, Kernel provides unlisted index funds, not ETFs. However, they serve the exact same purpose and are often preferred by passive investors.
Pros: Very low fees, tax-efficient PIE structure, excellent digital interface, auto-rebalancing.
Cons: Not traded on the exchange (priced daily), fewer niche sector options than global markets.
InvestNow (The Aggregator)
InvestNow is not a fund manager but a platform. It allows you to buy Smartshares ETFs and unlisted managed funds (like Foundation Series or Vanguard International) without brokerage fees.
Pros: No transaction fees for managed funds, access to both ETFs and unlisted funds in one portal.
Cons: The interface is functional but less modern than competitors; buying ETFs directly here avoids brokerage but lacks real-time trading execution.
Fee Structures: Spreads, Brokerage, and Management Fees
The cost of investing is the one variable you can control. In the debate of Managed Funds vs ETFs, fees appear in different places.
Management Expense Ratio (MER)
This is the annual fee charged by the fund manager.
Passive ETFs/Index Funds: Typically 0.20% to 0.60% in NZ.
Active Managed Funds: Typically 1.00% to 2.50% (plus potential performance fees).
Brokerage vs. Spreads
ETFs: When you buy an ETF on Sharesies or ASB Securities, you pay a brokerage fee (e.g., 1.9% or $15). You also pay the “spread”—the difference between the buy and sell price on the exchange.
Managed Funds: Usually have $0 brokerage fees. However, some charge a “buy/sell spread” (e.g., 0.10%) to cover the cost of the fund manager entering the market. This makes unlisted managed funds generally cheaper for those contributing small amounts frequently, as you aren’t hit with a fixed brokerage fee every payday.
Auto-Investing Strategies for Kiwi Investors
The most successful strategy for most investors is Dollar Cost Averaging (DCA). This involves investing a fixed amount of money at regular intervals, regardless of what the market is doing.
Auto-investing with Managed Funds: Platforms like InvestNow and Kernel are built for this. You set up a direct debit, and the money is automatically allocated to your chosen funds without transaction fees. This friction-free method is highly effective for behavioral compliance.
Auto-investing with ETFs: Sharesies allows auto-investing into ETFs, which has been a game-changer. Smartshares also offers a direct lending facility where you contribute monthly, but this often involves a $30 set-up fee and lacks the flexibility of modern apps.
Summary: Which Should You Choose?
Choose ETFs (via a broker) if: You want intraday liquidity, you want to use limit orders to control your entry price, or you are investing a lump sum where brokerage fees are negligible percentages.
Choose Unlisted Managed Funds (Index/Passive) if: You are contributing small amounts from every paycheck (DCA), you want to avoid brokerage fees completely, and you prefer a simple “set and forget” tax structure via a PIE fund.
Frequently Asked Questions
Are ETFs a good investment in NZ?
Yes, ETFs are an excellent investment vehicle for NZ investors seeking diversification. They offer low-cost access to local and global markets (like the NZX 50 or S&P 500) and generally outperform actively managed funds over the long term due to lower fees.
Do I pay tax on ETFs in NZ?
Yes. If the ETF is NZ-domiciled (like Smartshares), it is likely a PIE fund taxed at your Prescribed Investor Rate (max 28%). If it is a foreign ETF (like Vanguard US), you are subject to FIF rules if you hold over $50,000 NZD in foreign cost basis.
What is the difference between an ETF and an Index Fund?
An ETF is a fund structure that trades on an exchange. An Index Fund is an investment strategy that tracks a market index. An ETF can be an index fund, but not all index funds are ETFs (some are unlisted managed funds). In NZ, Kernel offers unlisted index funds, while Smartshares offers ETF index funds.
Is Kernel better than Smartshares?
It depends on your strategy. Kernel generally offers lower fees and a better user interface for auto-investing, but they are unlisted funds. Smartshares offers a wider range of specific sector ETFs and is listed on the NZX, which some investors prefer for liquidity.
Can I lose money in a managed fund?
Yes. Managed funds and ETFs invest in assets like shares and bonds, which fluctuate in value. If the market drops, the value of your fund units will decrease. However, diversified funds are designed to recover and grow over the long term.
How do I buy Vanguard ETFs in NZ?
You can buy Vanguard ETFs directly via brokerage platforms like Hatch, Stake, or Sharesies (subject to FIF tax rules). Alternatively, you can buy NZ-domiciled funds that wrap Vanguard products (like Smartshares Total World ETF) or unlisted funds via InvestNow (Foundation Series) to handle tax more easily.
