How Are ETFs And Unit Trust Different?
The variety of investment options that are available can be overwhelming, especially for people who are just starting out. For example, unit trust and exchange traded funds (ETFs) both deal with pooling investments together to trade securities; but how they work is quite different from one another.
So to clear out the confusion and help you make informed decisions, we’re going to look at the differences between the two.
What are ETFs and Unit Trust?
Before we can discuss the differences between these two investment options, there’s one important question that needs to be answered first; what are ETFs and Unit Trust?
Here’s the answer:
Exchange traded funds
ETFs are a type of pooled investment security. Typically, ETFs are created to track a particular index, sector, commodity; meaning that their performance will reflect the performance of the chosen group of investments. If the index goes up, so does the value of your ETF, but its value will also drop if the index drops.
In simpler terms, ETFs are a lot like unit trust. However, they have the added benefit of being able to be traded like stocks. Your share of an ETF can be sold at any time during the day, instead of having to wait for the end of a trading day, you can also trade ETFs on margin and short sell them if you want.
Meanwhile for a unit trust, you and other investors will invest a certain amount of money in a mutual fund; a pool of money collected from a number of investors to be invested in securities like stocks, bonds and other assets, that is managed by a fund manager. This manager will try to achieve the goals of the fund, based on the guidelines set out when the fund was created.
Difference between ETFs and unit trust
Okay so now that we know what exactly is a unit trust, and what ETFs are, let’s have a look at the difference between these two types of investment options.
|Management style||Typically passively managed||Actively managed by a fund manager|
|Purchase and sell availability||- Listed and quoted on the stock exchange|
- Bought and sold like stocks throughout the trading day
|Can be purchased and sold through agents who work for a fund management company or institutional unit trust agents such as banks.|
|Cost to invest||- Brokerage fee, clearing fee, and stamp duty, similar to trading shares|
- Annual management fees (less than 1% of the ETFs net asset value (NAV))
|- An upfront sales fee between 3% to 5%
- A back-end charge or exit fee.
- Annual management fee (can be anywhere from 0.75% or 5% of the fund’s NAV)
|Minimum investment amount||- No minimum investment||- Typically needs an initial minimum investment of RM1000
- Lower subsequent investments, such as RM100.
Typically ETFs are passively managed, due to their nature. Typically an ETF is designed to follow the performance of a certain index, thus it’s performance will closely follow the index’s performance, meaning there will be no need for excessive micro-managing.
Due to this, the job of a fund manager for ETFs will typically be to closely follow the performance of the set benchmark index, and make decisions based on the performance of said index.
There are actively managed ETFs, such as bond ETFs and stock ETFs, but this will usually need a bigger commitment from the investors, so be sure to study these types of ETFs more if you are interested in active ETFs.
Meanwhile, unit trusts are typically actively managed, but by a fund manager. The task of the fund manager is to ensure that the performance of the unit trust closely follows the set goals of the unit trust, and to make decisions based on that criteria.
So with this, as individual unit holders, you will be asked to put your trust on the fund manager and his/her skills, as the performance of the unit trust depends on them.
Buying and selling
ETFs can be bought and sold on the stock exchange, just like normal stocks or bonds. This also means that it can be bought and sold on the exchange throughout the trading day, which might mean that you can closely follow the performance and decide to buy and sell on the same day itself, which might mean more short term profit potential.
However, unit trust is only available through agents who work for a fund management company or institutional unit trust agents such as banks, which means that you cannot buy and sell individual units of a unit trust at the exchange.
Cost to invest
One of the major differences between ETFs and unit trusts is the cost it takes to invest in them. For ETFs, you will have to pay all the typical fees needed for trading shares, which means the brokerage fee, clearing fee, and stamp duty.
You will also have to pay an annual management fee, but this amount is typically set at lower than 1% of the ETFs net asset value (NAV).
Meanwhile, unit trusts impose different fees, such as an upfront sales fee that can be anywhere between 3% – 5% of the unit trust NAV.
They usually also charge a back-end charge or exit fee when individual unit holders decide to redeem their fund
An annual management fee is also imposed, which is typically set at anywhere from 0.75% to 5% of the unit trust’s NAV.
Minimum investment amount
For ETFs, there is no minimum cost of investment set for them, as you can buy ETFs on your own, with whatever amount you feel comfortable to invest with.
However, for unit trust, there usually is a minimum amount of investment needed, which is set by the institution or fund management company that is supporting the unit trust. In Malaysia, this minimum investment amount is typically set at RM1000.
However, the subsequent minimum investment cost for unit trusts is usually a lot lower than the initial investment cost, as it can start at as low as RM100.
Which option should you choose?
Now that we’ve discussed the differences between both ETFs and unit trust, the question remains, which investment option should you invest in?
Well that depends on many factors, such as your investment goals, your investment budget, how much time are you willing to spend on your investment, and many more.
So before you make a decision, be sure to properly understand why you are investing, and what you are willing to invest, be it time or money.