The world of investment can be daunting, especially if you're just starting out and can't tell the difference between a unit trust and an exchange-traded fund (ETF), much less decide which one to put your hard-earned money in. What's the difference?
We break it down for you.
|What it is||Both are collective investment schemes. This means your money is pooled or comingled with money from other investors and invested according to the fund's investement objective. This gives you wider access to funds that you otherwise might not have access to on your own. You can also invest with cash or CPF and SRS monies for both schemes.|
|How it works||Unit trusts (UTs) are actively managed by professional fund managers such as Blackrock, Aberdeen, Fidelity, amongst others. They are experts in their fields, whose full-time jobs are to monitor the markets and make decisions using their knowledge of the markets, internal research, and analytical tools that you may not have access to.||ETFs are passively managed and trade on a stock exchange, which means the cost is reduced. They usually track a specified index, since they invest in a basket of securitiess in the same proportion of the index that it is tracking. Therefore, you don't necessarily need a financial adviser representative or a funds platform. To invest in an ETF, you simply need a stock brokerage account.|
|How are they managed?||UTs generally require active management as the fund manager selects the securities which he feels offers the highest possible return for the fund's objective. They are usually looking to outperform the market.||ETFs typically required more passive management as you only need to replicate the performance of the index as closely as possible. Typically, this means that the proportion of stocks in the ETF will be the same as the proportion of stocks of the index that it follows.|
|What determines its price?||The unit price is determined by pricing each of the underlying securities of the portfolio at current market value.||ETFs trade similarly to stocks which means they are priced by supply and demand of the market and are subject to fluctuations in market value. Since ETFs trade on an exchange, this means you can usually buy and sell at any point in the day during market opening hours.|
|Advantages||Each unit trust typically invests in a range of assets which means your risks are diversified. If one particular asset doesn't perform as well, the gains from other assets could offset any losses. While there are no guarantees, there may not be an adverse impact on your investment as a whole. Since the aim of unit trusts are to outperform the market, the fund manager may decide to rebalance or exit a position if he thinks the fund will perform better. This means that your exposure to poorly performing underlying holdings may be better managed.||For example, investing in an ETF such as the Straits Times Index (STI) ETF gives you exposure to 30 of the largest and most actively traded compaines on the Singapore Exchange (SGX) such as Singtel, DBS and Keppel. The ETF will try to replicate the STI index by investing in a basket of securities that has the same weighting as the Index.|
|Disadvantages||Since unit trusts require the expertise of the fund managers, they typically offer higher costs than ETFs.||When investing in ETFs you will have exposure to the volatility of the benchmark that the ETF is tracking. This means you will exposed to sectors during both upturns and downturns in the market regardless of the sectors furture outlook.|
|Liquidating your investments within a short timespan may result in capital losses. If you're looking to invest in either, you are strongly encouraged to stay invested for long periods of time. This is generally perferred to ride out short term price fluctuations.|
|Uprfont brokerage fees||Upfront fee or sales charge
Upfront fee range from up to 2.8% or 5% depending on the plan. This amount is usually deducted from your total investment. For example, if you invest $10,000 and the upfront fee is 1%, your total investment sum is $9,900.
Because ETFs are traded like shares, buying or selling is subject to a broker fee which depends on the market rate (est. 0.28%).
The more frequently you trade, the higher broker fees you pay. That said, the larger your investment amount the cheaper your broker fee will be.
|Management fees||You will need to pay an ongoing management fee for both ETFs and unit trusts. Unit trusts generally have a higher management fee because you're paying for the active management of the fund and the fund manager's expertise.|
Which one's better?
There's no "better" choice as it depends on your risk profile and investment objectives. ETFs can be a good choice if you think you've got the expertise to navigate the world of stocks on your own and you're seeking market performance.
If you're just starting out or don't have the time to manage your investments and prefer to leave it to the experts, then unit trusts, which may offer potentially higher market returns, could be a more suitable option for you.
Not sure how to get started? Leave down your details below and we'll be in touch to send you more information about Navigator, Singlife's unit trust platform.