Unit Trusts and ETFs – Which is Better?
Many Singaporeans view Units trusts and ETFs as easy and cheaper ways to invest in market securities. Both pool money together from a vast number of interested investors to invest in bonds, stocks, and other commodities. They are also both tuned to help build a diversified portfolio using a single investment.
The three above similarities can pose a decision paralysis to a new investor while deciding which one to invest in. Despite these similarities, fundamental differences with significant implications do exist between the two investment options. It is, therefore, essential to understand both before deciding the best investment option for you.
This article spells out the key similarities and differences between unit trusts and ETFs under the following points:
- How it works
- How they are managed
- The pricing method
- Fees involved
A unit trust, also called a mutual fund, pools money from many people to invest in stocks, bonds, and other securities. Unit trusts exist as a stack of unique fund products with different goals. Funds collected must be invested according to the product objective. A unit trust provides access to a broader investment that you wouldn’t have access to on your own.
How it works
A fund manager runs a unit trust and analyzes potential investments. These fund managers engage transactions that seek to maximize investment returns. A Singaporean can choose from many available unit trusts. They range from Singapore blue-chip shares to Asian bonds to lavish Russian or global companies’ equities.
When you invest in unit trusts, you bet on the fund manager’s ability to pick on the best performing securities. Unit trusts are traded through private channels. They comprise a higher cost structure compared to their counterpart’s ETFs.
How they’re managed
Unit trusts are actively managed by fund managers or management companies like First State Investments, Aberdeen, Blackrock, Schroders among others. These managers use their knowledge and skills to determine how to allocate pooled money. Their role includes to review, adjust and balance investors’ portfolios. The manager’s expertise in the securities market significantly determines the investment performance.
The fund managers select securities that are likely to offer the highest possible returns that can outperform the market. This active management attracts high fees, and this make unit trusts to give lower yields.
The pricing method
Firstly, the underlying securities of a portfolio are priced at the current market value. Then, the Net Asset Value (NAV) is used to calculate the price of a unit trust. NAV is the total value of investment minus the liabilities of the fund. The fund manager arrives at the price of a unit trust by dividing the NAV by the total number of shares they issue.
The active management of unit trusts incurs fees to run the portfolio, paying the analysts and office rent. Many fund managers claim that they charge these fees in exchange for the return they expect to give. Fees involved with a unit trust comprise initial fee 1%-5%, redemption fee of 1%-5% and management fee or expense ratio of 1%-2.5%.
- Unit trusts diversify your risks by investing in a range of assets. When one asset fails to perform, the other assets that make profits may offset this loss
- The fundamental aim to outperform the market makes the fund manager rebalance the portfolio for better performance. Thus, poorly performing underlying assets are better managed
- Unit trusts typically attract a higher cost than ETFs since they require the expertise of fund managers
- Poor expertise skills of a fund manager translate to poor fund performance
Similar to a Unit trust, an ETF pools investors’ funds to invest in stocks, bonds and other securities. It aims to imitate the performance of the underlying commodities in which it invests. For instance, the Singapore Strait Times Index (STI) ETF closely tracks the performance of the index of the 30 largest companies of Singapore stock exchange.
How it works
Investors can trade ETFs on a stock exchange through a broker. Unlike unit trusts, they are not actively managed by fund managers. They trade like stocks, and their prices are subject to the pull of supply and demand in the stock market. Therefore, the price of an ETF does not necessarily depend on the value of the underlying assets. ETFs invest in a much larger variety than unit trusts.
ETFs require passive management as they only need to track a particular index. This essentially means that the proportion of stock in an ETF is the same as the proportion of stocks in the index it tracks. Therefore, the costs involved are usually lower.
The pricing method
ETFs are priced by the supply and demand of the securities market just like stocks. Thus, they are subject to market fluctuations. It typically means you buy or sell an ETF at the prevailing price at any time during market opening hours. You trade them the same way you can trade stocks in a stock exchange.
Fees charged include brokerage fees which depend on the prevailing market rate, usually at 0.28%. The more you trade, the higher you pay. The management fee you pay is less than that of unit trusts. The management fee averages about 0.5%.
- Investing in an ETF like STI exposes you to 30 of the best and most actively traded companies in Singapore. Such companies include DBS, Keppel, and Singtel
- ETFs come with low costs unlike unit trusts
- Broader diversification in comparison to unit trusts. They also come in a number of flavors that can tailor to individual needs
- ETFs are traded throughout the day thus highly liquid
- The market price to be traded may not be the same as the NAV of the ETF.
- You suffer exposure to the volatility of the index ETF is tracking
According to the above analysis, the benefits of ETFs outweigh those of unit trusts. ZUU Online recommends that you invest in ETFs mainly because of these three reasons. ETFs low costs don’t cut into returns, they have a more diversified exposure to the market, and their liquidity and versatility provide flexibility to face any economic condition.
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