Unit Trust Vs ETF

Unit Trust Vs. ETF: Which Should You Invest Your Money in?

A Unit Trust (UT) and an Exchange-Traded Fund (ETF) offer a low-cost investment option with relatively high liquidity. The goal for most investors is to have a diversified portfolio, which consists of many different securities to balance the risk that one security will have. Unit Trusts and ETFs allow investors to enter a diversified portfolio because they provide a lot of different securities to choose from without having to buy each one separately.

However, both have their respective advantages and disadvantages regarding profit-making, fees, and other factors. Learn more about both of them and which one to invest in by reading this post.

What are Unit Trusts?

Unit trusts are a type of investment that pools the money of many investors into one fund. Unit trusts are typically managed by an investment company or investment advisor and use the UT’s assets to invest in stocks, bonds, commodities, or other types of investments.

The advantage of unit trusts is that the investor doesn’t have to worry about picking individual investments. For example, if one of the stocks in the fund loses value, the investor only loses the amount invested in that stock, not the entire portfolio

 

How are Unit Trusts Priced?

Investors can calculate a UT’s price, also called Net Asset Value (NAV), by deducting a prospective company’s assets from its liabilities and using the company-shared UT shares as a divisor. The formula should look like this:

Total NAV = (Company assets – Company liabilities) / Shares issued

Here is an example:

A company has S $5 million worth of unit trust assets but pays S $2.5 million as part of its liabilities. It recently issued 500,000 shares.

To get the NAV value, we would use the following calculation:

NAV = (5,000,000 – 2,500,000) / 500,000

NAV = S $5 per share

 

Unit Trust Investment Fees

Here are the common charges investors need to pay for most UTs.

  • Initial Service Charge: Paid upon purchasing a fund, and it can be as much as 5% of your investment
  • Realization or Redemption Fee: Paid upon selling the fund, which can be as much as 5%. Sometimes, there’s no realization or redemption fee upon paying the initial service charge.
  • Switching Fee: Any investor moving from their fund will have to pay about 1% of their investment if it’s under the same fund manager. The fee can be higher if switching both funds and fund managers.
  • Online Sales Charge: Administrative fee for buying a fund online. It can be 0.8 – 1%of your investment

The high 5% fund management fees in most UTs leave many investors questioning its viability because most UTs worldwide have historically underperformed in many markets. 

Underperforming UTs due to 5% fund management company fees makes the fund easily lose its cost advantages. While some UTs have performed better than mutual funds, exchange-traded funds, or other collective investment schemes in the Singapore Stock Exchange, their fees can easily shave off some hard-earned profits.

 

Other Types of Unit Trusts and Index Fund

Here are the various UTs and index funds you’ll find in the market.

Type Assets
Money Market Fund Government and corporate securities, money market instruments
Equity or Stock Funds Stocks and equity assets
Income Fund Funds that invest in assets with constantly high dividends
Growth Fund High-growth stocks that have potentially high risks
Sector Fund Industry-centered stocks (financial services, healthcare, manufacturing, etc.)
Bond Fund Fixed-income assets (treasury bonds, municipal bonds, corporate bonds)
International Fund Securities inside and outside of Singapore
Balanced Fund A balanced set of stocks and bonds based on whole investor portfolios
Flexible Funds or Asset Allocation Manager-picked stocks and bonds
Index Funds Matches indexes it follows, such as the S&P 500 or local Singaporean indexes

 

All UT assets have their respective risks, which is why it’s good financial advice to consult with professionals, do research about all underlying securities, and use balancing assets, such as a mutual fund alongside a balanced fund, to ensure that you’re on the right track with your UT’s possible future performance.

 

Pros and Cons of Investing in Unit Trusts

Pros

  • A quick and easy diversified portfolio
  • Exposure to various securities quickly
  • Affordable for various investors
  • Managed by professionals
  • Very liquid

Cons

  • UTs can still lose money
  • Past UT performance does not guarantee its future success
  • Historically underperforming with high fees

What are ETFs?

An ETF is a security that tracks an index, a commodity, bonds, or a basket of assets. ETFs offer the advantage that the investor can buy into a diversified portfolio without having to purchase each asset. 

One of the advantages of ETFs is that they offer investors the opportunity to buy into a specific market or sector without purchasing shares in a fund that does not necessarily represent their investment objectives.

 

ETF Investment Fees

ETFs typically charge low fees, usually at 0.1-0.65%. The ETF immediately pays the management company through its profits or available assets, meaning investors don’t pay out of pocket. Typically, an investor will only pay for the transaction fees involved in buying and selling the fund, similar to stock markets.

 

Types of ETFs You Can Invest In

Here are the various types of ETFs that you can invest in today.

  • Cash-Based – Direct investments into stocks, bonds, and commodities
  • Synthetic – Uses derivative products for multi-index tracking
  • Swap-Based – Invests in swaps instead of stocks. They are often more volatile than conventional ETFs 
  • Access Product-Based – ETFs in restricted-access economies including China or India

ETFs have lower diversification than UTs but give you higher potential growth by focusing on industries or unconventional assets, such as swap-based ETFs with higher volatility than conventional ETFs. You can also access ETFs in restricted economies with access to product-based ETFs.

Investments

 

Pros and Cons of Investing in ETFs

Pros

  • Doesn’t have high costs of mutual funds
  • No maintenance and upfront fees
  • Access to well-diversified portfolios
  • Daily traded like stocks and other assets
  • Better liquidity than UTs
  • Fully customizable to an investor’s needs

Cons

  • Price isn’t always equal to its NAV due to irrational market psychology and expense fee impacts
  • It’s easy to lose ETF cost advantage

 

Key Differences Between Unit Trusts and ETFs

Here are the key differences between UTs and ETFs

Buying and Selling Management Type Liquidity Asset Classes Annual Fees Entry fees
Unit Trusts Private channels only Actively managed Low due to high fees and limited buying and selling Diversified 1.5% on average 3-5% of your investment per trade
ETFs Publicly-sold like stocks Passively managed High  Limited to asset classes available 0.05-0.7% Can be S $10 – S $20 for each trade

 

Based on this table and the pros and cons of each fund, you always get a set of assets that can perform well depending on the economic movements during your investment period. ETF’s industry-focused assets can give you higher returns when economies rise, and productivity collectively increases. On the other hand, UTs can give you a much better-balanced portfolio to mitigate risks even if you have to pay higher administrative fees.

 

Unit Trusts vs ETFs: Which is better?

In truth, there is no better fund between the two because both can excel or fail depending on the time you buy and sell during economic movements.

It’s safe to say that the best time to invest in UTs is when there is a significant dip in the market. In most cases, poor market productivity is when UT prices are low and have the highest chance of success. Buying UTs at the market’s peak is unwise because it will cause investors to lose much value from their initial trade, having to sell their investments at a loss.

On the other hand, the right time to invest in ETFs is when one has a specific industry or sector of interest and a need to diversify one’s portfolio. The industry-centered fund matters because different industries have different risk and return profiles. For example, the energy industry has faced significant headwinds as oil prices plunged over the last few years, meaning those invested in oil as a commodity had lost significant value on their initial trade.

 

FAQs for Further Study

Let’s answer some questions to further your knowledge about investment products

1. Do All UTs Have Active Management?

Active management is often necessary because the markets are not predictable. The manager is tasked with directing the investment of the scheme’s assets to meet the latter’s objectives, so active managers use a variety of techniques, such as technical analysis, fundamental analysis, and sentiment analysis, to produce a performance that is better than a buy and hold strategy. 

However, successful active management in unit trusts does not guarantee success. Many factors affect the success of active management, such as timing and stock selection which can lead to high or low returns.

2. Should Every Investor Have ETFs and Unit Trusts?

ETFs and Unit Trusts can be used to diversify assets and provide exposure to assets that an investor may not be able to access with individual stocks. It’s good advice that every investor should have some ETFs and Unit Trusts if they are looking for a diversified portfolio and do not want to manage the risks of individual stocks. In case it’s advantageous, investors can remove either UTs or ETFs from their portfolio if they’re not confident about each one’s trajectory based on the economic situation.

3. Are There UTs and ETFs Centered on Emerging Markets?

There are several ETFs centered on emerging markets. The most popular of these is the Emerging Markets ETF (EEM) which tracks the MSCI Emerging Markets Index. This index contains large and small-capitalization stocks worldwide that trade in emerging markets. Other ETFs centered on emerging markets are the iShares MSCI Emerging Markets Index Fund (EEM) and the Vanguard Emerging Markets Stock Index Fund (VEIEX).

Note that some of these funds aren’t available with local-oriented UTs and ETFs, so look for brokers and assets that let you invest in international assets to find these.

4. What is Better: Individual Securities or ETFs?

There are strong arguments for both. One pro for individual securities is that investors can weigh holdings according to their individual expectations, and it is possible to employ a more nuanced investment strategy. ETFs allow for more diversification with a lower expense ratio, but they also have relatively lower liquidity than individual securities.

 

Our Final Thoughts

Both UTs and ETFs have their respective strengths and disadvantages. The investor must understand the current economic situation and which assets can have potential growth in making the best choice when choosing between UTs and ETFs

  • Unit trusts (UTs) are pools of money of many investors into one fund and are usually managed by an investment company or investment advisor.
  • Exchange-traded funds (ETFs) track an index, a commodity, bonds, or a basket of assets and allow investors to buy into a diversified portfolio without purchasing each individual asset. 
  • The investment decision depends on the investor’s research on current economic strengths and weaknesses to make the right investment into either UTs or ETFs.

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