etf vs mutual fund vs unit trust

ETF vs Mutual Fund vs Unit Trust: The Best Investment-Case Uses

ETFs, mutual funds, and unit trusts encourage you that they’re the best investment options for your first portfolio based on the advertisements and word-of-mouth encouragement you receive from advertisers. However, these financial instruments derive and shield their values depending on the assets they hold, making a full understanding of each one crucial to helping you achieve profits and cut losses.

In this short guide, you’ll learn about ETFs, mutual funds, and unit trusts to help you learn the best investment use case for each of them and create profits in no time. Click here to learn more on how to invest in stocks to invest in Singapore.

ETF

An exchange-traded fund (ETF) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. ETFs are traded on stock exchanges just like any other company’s stocks. Because ETFs follow the performance of their underlying asset class, they provide investors with access to those markets without buying individual securities to follow them.

Different Widely-Used Types of ETF

Here are six common types of ETFs that investors use in diversifying their portfolio

1. Equity

Equity exchange-traded funds track an equity market and mostly invest in companies’ stocks. Equities can be traded on the stock exchange in short or long positions.

The risk of equities is relatively low because the value of a stock is based on how good the company is. If the company’s profit goes up, then the stock’s value will go up as well. However, anchoring your entire portfolio to a single company or industry’s performance leads to poor diversification, making it essential to consider other ETFs in this list to achieve balance.

2. Bond/Fixed Income

A bond or fixed-income ETF is a type of exchange-traded fund that invests in bonds, notes, and bonds futures. The fund focuses on debt securities, which makes them a good investment for conservative investors.

These financial instruments always offer guaranteed returns and usually include government bonds, corporate bonds, municipal bonds, and high-grade corporate debt. Their fixed values by the bond’s maturity are guaranteed, shielding them from any market fluctuations that can likely reduce their value during an economic upturn.

3. Currency

A currency ETF is an exchange-traded product that allows investors to invest in a certain currency. Unlike a mutual fund or other investment, the ETF is not managed by a financial institution, but rather by its custodian, which is typically one of the major exchange houses.

Currency ETFs are highly liquid and are often used as a hedge against the devaluation of one’s own currency. For example, if the US dollar isn’t performing well due to economic downturns but the British Pound is currently having top-level performance, an investor can use a currency ETF to exchange their cash in bulk to avoid losses.

4. Specialty

A specialty ETF is an exchange-traded fund (ETF) that invests in a specific asset or a narrow market segment. An example of a specialty ETF is the iPath S&P 500 VIX Short-Term Futures ETF (VXX), which invests in futures on the volatility of the S&P 500 rather than on the underlying asset.

The idea behind a specialty ETF is that by investing in a specific sector or asset, the fund has a better chance at outperforming an index. For example, an ETF might focus on the healthcare industry because they believe it to have exceptional growth, whereas an index may not give this investment strategy enough of a boost.

5. Factor

Factor ETFs are investment vehicles that invest in securities that invest in stocks based on factors such as value-based investing, low volatility, momentum, dividends, and others.

The underlying index or benchmark determines the factors for each security it is based on. For example, a factor ETF that invests in the FTSE RAFI US 1000 Factor Index will gain exposure to US stocks with a high return on capital employed and a low price to book ratio.

Some factor ETFs are made up of securities that are weighted according to a particular factor, such as “growth” and “value.” For example, the iShares Russell 1000 Growth ETF (IWB) is made up of securities weighted according to a factor designed to reflect the performance of U.S. stocks with high growth potential.

6. Sustainable

Sustainable ETFs are exchange-traded funds that are specifically developed to track sustainable investment strategies.

One example is the Vanguard Wellesley Income Fund. It tracks a portfolio of sustainable dividend-paying stocks from various small and mid-cap companies. Another one is the FTSE Social Index ETF, which invests in sustainable companies that have a social goodwill and improvement objective as part of their company values.

Sustainable ETFs allow investors to earn profits from companies with sustainable operations that help preserve the environment and contribute to sustainability efforts in the world.

Benefit and Risk

Benefits

  • ETFs allow investors to trade in and out of the market quickly
  • They are low-cost options for investors since they are index-tracking
  • These assets are liquid and can be traded throughout the day

Risks

  • The expense ratio can get higher than that of mutual funds
  • The risks associated with the ETF may be different from the risks associated with the underlying securities

Consider investing in ETF If You’re

  • Actively Trading: You can trade ETFs as you would a stock or other asset. This high liquidity allows active day traders and short-term investors leverage to create intra-day trades, initiate stop and limit orders, and achieve optimal earnings by giving themselves the best position to profit.
  • Looking For Tax Efficiency: Depending on tax laws, ETFs are highly tax-efficient on average than other assets. 
  • Want Niche Exposure in Any Market: Imagine the entire market as a huge set of subsets that tackle various aspects of each market. For example, the industrial market has construction, mining, and home renovation. Picking an ETF that focuses on mining exposes you to this industry while shielding you against the fluctuations in construction and home renovation industries.

Mutual Fund

A mutual fund is a collection of securities purchased by investors and held as an investment. The fund manager will use the securities in the portfolio to generate income and then distribute some or all of this income to the fund’s shareholders.

In short, investors pool their money and purchase securities with a hired fund manager’s expertise in management to make profits. The fund manager will use these investments to generate income and then distribute some or all of this income to the investors who contribute and own the fund.

Mutual funds are different in that they pool the money of many investors and work with a financial advisor. On the other hand, ETFs and Unit Trusts are often managed by a single company or custodian only.

Types of Mutual Funds In The Market

There are four types of mutual funds in the market

1. Money Market

A money market fund is a type of mutual fund that invests in short-term debt securities and typically offers investors the opportunity to redeem their shares daily. Money market funds are typically low-risk and liquid, making them an attractive alternative to other investments.

For example, the Fidelity Money Market Fund seeks to provide investors with a safe, convenient way to earn interest on their cash by investing primarily in high quality, short-term debt securities issued by the U.S. government, government agencies including the Federal National Mortgage Association, and government-sponsored enterprises.

2. Bond

A bond is a debt security with a maturity that is greater than the length of time it takes to pay off the investment. Bonds are most often issued by governments or corporations and are usually payable at a fixed interest rate over a set period. Bonds typically have their value calculated as a percentage of their face value.

A bond fund is a mutual fund that invests in bonds. These funds typically invest in a diverse range of bonds to avoid the risk of being over-concentrated in any one sector of the bond market. For example, the Vanguard Short-Term Investment-Grade Fund (VFSTX) is a mutual fund that invests in corporate and government debt securities. It seeks to provide investors with a high level of current income by investing in short-term securities.

3. Stock

A stock mutual fund is made up of many different stocks. The stocks are bought and sold based on the mutual fund’s rules, which might specify when or how often the investment can be bought or sold. A fund manager oversees all the assets to buy and sell to grow the fund’s profits.

Stock mutual funds are almost equal to ETFs, but these have active management and has you pool your money with other investors. For example, the Vanguard 500 Index Fund is a type of mutual fund that invests in a broad range of stocks, bonds, and other securities. The fund is structured to provide an efficient way to track the performance of the S&P 500 Index.

4. Target Date

Target-date mutual funds are mutual funds that have been designed with an age or time horizon in mind. They hold investments that mature at different dates. This means the target date mutual fund is designed to be sold in pieces, with the most volatile and risky assets (like stocks) being held until the future date they would be likely to have matured.

There are two main types of target-date mutual funds. The first type is a “target retirement fund” that provides the investor with a specific date to retire. The other type is a “target growth fund,” which is an asset allocation strategy for investors who wish to invest for the long term, but do not know in advance when they will retire.

Benefits and Risks

Benefits

  • Actively managed by fund managers
  • Shared investment expenses
  • Low trading costs

Risks

  • Non-guaranteed returns
  • Dependent on manager expertise and conformity

Unit Trust

Unit trusts are unincorporated mutual funds whose profits directly go to the investor rather than get reinvested into the mutual fund pool. Its main difference with mutual funds is the existence of trust deeds wherein each investor is a trust fund beneficiary. Trust funds have the right to use their money in a way that best suits the interests of themselves and their beneficiaries.

A trust deed is a legal document that creates a trust signed by the trustees of the trust and the investors who are the trust’s beneficiaries. The trustees hold the assets of the trust on behalf of the beneficiaries, as long as they follow the terms of the trust deed. They can also delegate their responsibility to manage and distribute trust assets to other people or organizations.

Index Funds and Other Types of Unit Trusts in The Market

Balanced Funds

The primary goal of balanced unit trust funds is to minimize the risk of stock market fluctuations by providing investors with various asset classes. There are many different types of balanced unit trust funds, including balanced growth unit trusts and balanced income unit trusts.

Balanced income unit trusts typically have a higher allocation to fixed income securities and lower allocation to equities. Balanced growth unit trusts have a higher allocation to equities and lower allocation to fixed income.

mutual funds concept

Fixed Income Funds

Fixed income trust funds are designed to provide a steady stream of income. They are often more conservative than other investments, such as stocks, because they don’t require the company to perform well in order to generate a profit. Fixed income trust funds are a great way to protect against inflation and preserve the purchasing power of your money.

Real Estate Investment Trusts (REITS)

REITs, or real estate investment trusts, are companies that invest in real estate for the purpose of generating revenue. REITs are similar to mutual funds because they’re not publicly traded.

REITs provide current income, which is typically paid monthly. Additionally, investors have the potential to reinvest their dividends and income for higher returns and more income. For example, with an REIT, an investor can expect to make an income from their investments, no matter the stock price.

Shariah Funds

Shariah funds are an investment vehicle that allows Muslims to invest in the market without violating Islamic law. This can be accomplished by investing in Shariah-compliant products from countries whose markets are open to non-Muslims, or by investing in Shariah-compliant products from countries whose markets are not open to non-Muslims but which claim to provide Shariah compliance.

Benefits and Risks

Benefits

  • High degree of diversification
  • Access to investment funds not available through other channels
  • Actively managed funds

Risks

  • Reliance on fund manager expertise and conformity
  • Not as liquid as typical mutual funds and ETFs
  • Long-term-oriented investments

Verdict

ETF: Best for Short to Mid-Term Investors

ETFs are liquid as stocks and other assets, making them a good option for those with time and expertise to manage the fund and potentially outperform an index fund. Plus, it’s easy to buy and sell ETFs across various sectors and commodities, allowing short and mid-term position investors to make the most out of small value increments in the market for profit.

Mutual Fund: Best for Mid to Long-Term Investors

Mutual funds are as liquid as ETFs, but they’re collective investment schemes run by a fund manager, and you pool cash together with other investors. Fund managers can create profits or redirect them to optimize their overall growth. Therefore, only the fund manager can assess the best way to outperform certain indexes and assets while investors have to wait until their mutual generates any significant growth.

investment strategy

Unit Trust: Best for Long-Term Investors

Unit trusts are very good at long-term investing because they tend to have a lower cost per unit and are much more tax-efficient than other types of investments. Plus, most UT contracts require the fund manager’s approval as their the UT’s trustee and act in good faith by advising you about your best course of action over the fund.

Our Final Thoughts

ETFs, mutual funds, and unit trusts have their respective usefulness in the bigger aspect of portfolio building nad investing. Use them wisely, and they can grow your investment to new heights. 

  • ETFs are like stocks that you can buy and sell. They often track popular indexes that are performing highly and represent a niche segment of all existing markets.
  • Fund managers run mutual funds and allow you to pool cash with other investors. They are relatively liquid and have access to various assets, including ETFs and unit trusts. However, you have no control over many of its core investment and operational aspects.
  • Unit trusts treat its investors as beneficiaries with respective trust deeds and fund managers as trustees that act in good faith for its beneficiaries. These are similar to mutual funds but are much more suited for long-term investments.

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