Episode 004 - UNIT TRUSTs vs ETFs

This blog is for solving (hopefully) some unanswered questions and resolve any ambiguity you might have with regards to ETFs and Unit Trusts. So what is the main difference between these two? The nice part about this blog is that I come from an investment house that manages both, so I won’t be biased and show any preference, I think.

Small investor or Big investor

Because we don’t get paid the same salaries, the amount of money that we dedicate to savings is totally different. The great thing about ETFs and Unit Trusts is that they cater to both the big investor and the small. They are both collective investment schemes and are regulated the same and allow for fund managers to pool investments from individuals, big or small and collect in one scheme and invest in asset classes based on the total investment pool’s aim. So anyone can invest as much as they can, the fund manager will collect all the total investments and invest it in a pooled fund.

Accessibility

The first thing I’d like you to know as an investor is that both of these products are available to you and are very easy to access!

• Unit Trust: if you have opened an investment account with a Investment Management house like Sygnia, Satrix or Coronation etc. Usually each house has a list of Unit Trusts for you to choose from and these vary from funds that hold stocks in a particular sector (like Property shares, Corporate and Government Bonds, Mining stocks etc) or a particular market (South African Top 40 companies, China stock market, S&P500 stocks etc).

• Exchange Traded Fund (ETF): As long as you have a broker account you can trade ETFs. This is a fund that can be constructed exactly the same as a unit trust in terms of the underlying holdings but can be traded in the exchange (like the Johannesburg Stock Exchange - JSE) hence the name “Exchange Traded” Fund.

Example: Sygnia offers both the Sygnia Itrix Top 40 ETF and the Sygnia Top 40 Index Unit Trust. Both are passively managed equity portfolios and deliver returns that mirror the FTSE/JSE Top 40 Index. Both of these track the performance of the biggest 40 companies listed in the JSE and are both available in the different platforms.

Trading times

• Unit Trusts only trade once a day, normally at 5pm. This means that if you want to invest/disinvest in a certain unit trust, you need to send your instruction to the investment house before a cut off time. Some houses have a cut off time of 2pm, so that they can consolidate all the inflows and outflows and trade everything all at once by 3pm. The Unit Trust prices are published every day and can be available on the investment house’s website.

• ETFs on the other hand trade on the exchange which means you can trade them all day. ETFs trade the same as normal shares that are listed in a stock exchange. If you have a Broker, you can trade in and out of ETFs throughout the day.

Investment value

• Most of the time Unit Trusts have minimum investments requirements; where for example the Investment house would ask the investor to set up a monthly debit order with a minimum amount of for example R350 per month, or they would require a minimum lump-sum payment. In order to buy a certain exposure to a Unit Trust whether it’s local or offshore the investor always has to go through the investment house.

• Since investors only need a broker to trade the ETFs from the exchange this means they don’t have cut off times, they don’t have a minimum value to trade and they can trade ETFs between each other just like shares.

Fees:

Most of the time ETFs are index tracking products, which means they are passively managed so the fees are generally low. With Unit Trusts, it depends on the Investment house. There can be a passively managed Unit Trust and there can be an actively managed unit trust (stock picking). Actively managed funds are generally more expensive (3 times expensive) than passively managed funds.

Essentially if you wanted to buy exposure to the top 40 biggest companies listed in the JSE you have the following options; Either buy the shares one buy one and create your own portfolio which is quite expensive or you can either use a Unit Trust or an ETF, a much more cheaper cleaner.

On my next blog I will explain more on what type of Unit Trusts and ETFs we manage and what is on offer - so you can choose what you want exposure in.

Signing out.