Unit trusts and ETFs are often confused as both are vehicles to gain exposure to a basket of individual securities. They can both be active or passive investment products. However, in reality, the two have several differentiating factors.
What is a unit trust?
A unit trust is a type of financial vehicle where money is collected by the fund manager from many investors to invest in securities like stocks, bonds and other assets. The vehicle is set up under a trust structure, which allows the investor to effectively own the underlying investment held in the vehicles. Unit trusts are often bought and sold through financial advisors and online fund platforms.
What is an ETF?
An Exchange Traded Fund (ETF) is traded on the stock exchange, just like stocks. Instead of owning a share in a company, one owns a financial vehicle where money is collected by the fund manager from many investors to invest in securities, similar to unit trusts.
Differentiating factor: How they are traded and their liquidity
The main difference is that exchange-traded funds (ETF) are traded like a stock throughout the day on a stock exchange. As a result, ETFs have a bid-ask spread, and therefore a greater implied cost most of the time, as they are focused on providing investors the opportunity to trade regularly, especially intraday. Unit trusts trade at the net asset value (or the underlying value) of the fund, which is based on the market closing price that day, and is more suitable for long-term investors who do not need intraday liquidity. Index unit trusts and ETFs are designed to closely track benchmark indexes passively at low cost.
Are unit trusts more expensive than ETFs?
Generally, unit trust providers and distributors may sell unit trusts with high sales charges with high management fees, which may make unit trusts, as a product type, seem more expensive than ETFs. However, there are lower costs share-classes for unit trusts with management fees in-line with or below ETFs for similar and even better-implemented exposure. It's important to understand the fees involved for ETFs and unit trusts, and be critical of what you are buying.
Other potential fees for investing in unit trusts:
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