I have been asked this question quite a lot in the past 6 months. Hence, I thought it would be good to explain the differences in an article.
A quick Google search came up with the following definitions of Unit Trust, Mutual Fund and ETF.
According to Wikipedia:
“A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors’ money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on the trust, it may invest in securities such as shares, bonds and also properties, mortgage and cash equivalents.”
According to Vanguard:
“A mutual fund is a pooled collection of assets that invests in stocks, bonds, and other securities. When you buy a mutual fund, you get a more diversified holding than you would with an individual security, and you can enjoy the convenience of automatic investing if you meet the minimum investment requirements.”
According to Investopedia:
“An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.”
Before we dive into the differences, let us look at the similarities between Unit Trusts, Mutual Funds and Exchange Traded Funds (ETFs).
These are Collective Investment Structures, meaning that money from many individual investors is pooled and then invested and managed by a portfolio manager. The advantages of them all are that one can get exposure to many asset classes (e.g. equities, bonds, fixed income instruments) and competent fund managers conveniently, with relatively low minimum investment amounts, and at a low cost. One thing to note is that the professional fund manager has discretionary powers i.e. does not need to seek the investors’ permission for each transaction.
Examples of ETFs in the Singapore market:
- SPDR STI ETF
- Nikko AM STI ETF
- SPDR Gold Shares ETF GLD US$
- Nikko AM StraitsTrading Asia ex Japan REIT ETF
- iShares USD Asia High Yield Bond Index ETF
- Lion Phillip S-REIT ETF
- Lion-OCBC Securities Hang Seng Tech US$
- UOB APAC Green REIT ETF
Examples of Unit Trusts in the Singapore market:
- abrdn Singapore Equity
- Amundi Funds Emerging Markets Blended Bond
- Blackrock European Equity Income
- Fidelity America
- Franklin Templeton WA Global Bond Trust
- First Sentier Bridge
- FSSA Dividend Advantage
- LionGlobal Infinity US 500 Stock Index
- Nikko AM Shenton Global Opportunities
- Schroder Asian Equity Yield
- United Greater China
- Different in structure
For most retail investors, unit trusts are very similar to mutual funds in practice. Unit trusts is more a British term where as mutual funds are more American. The two terms are often used as synonyms.
Internally, their structures may differ i.e. with unit trusts, the money could be placed in a trust which is a custodian such as a bank, and the portfolio manager initiates transactions for that money based on the fund’s mandate as well as their analysts’ research and conviction. On the other hand, the money in a mutual fund usually remains with a fund management company where it will allocate it towards various investment opportunities.
- How they are managed
Funds can be actively or passively managed.
Actively managed funds are where the portfolio manager regularly makes decisions about allocations and transactions based on his or her opinion (which is supposed to be based on research). Unit trusts are typically managed actively which means the fund manager tries to outperform a benchmark index. This can lead to higher fees.
Passively managed funds simply aim to mirror an index (a basket of securities) which is based on and regularly re-adjusted to align with a publicly available formula. It does not need a highly-paid portfolio manager and analysts for any research and decision-making. This is why passively managed funds like ETFs usually have much lower operating and management costs than actively managed funds.
- How they are traded
ETFs, as the name suggests, are funds that are traded on the stock market, and can be bought and sold through a broker, similar to common stock. They are priced many times a day by the market but usually the price is quite close to the NAV (net asset value) of the fund. This means that you can buy or sell ETFs throughout the trading day, at the prevailing market price.
Regular unit trusts and mutual funds can be bought directly from the fund manager (and their selected intermediary platforms). They are priced at the end of every day, based on the fund’s NAV and divided by the number of units issued out. This means that you can only buy or sell unit trusts at the end of the trading day.
For the investor, if the pricing is the same, there is not much of a difference whether the fund is exchanged-traded or not. The quality, cost, and valuation of the fund itself matters much more.
ETFs are generally more liquid than unit trusts. This is because ETFs can be traded throughout the trading day, while unit trusts can only be bought or sold at the end of the trading day.
Here are 8 important things to look out for in the monthly factsheet and annual report:
- The mandate i.e. stated objective of the fund and its intended asset classes.
- The benchmark index.
- The fund’s track record – how many years since inception and its performance versus its own benchmark.
- Basics such fund size, currency, domicile, and the portfolio management company.
- The assets the fund holds i.e. the underlying assets – which companies, securities, and geographies. If possible, know the valuations of those assets.
- The concentration levels. What proportion of the fund do the top 10 holdings account for. This reveals the conviction of the portfolio manager.
- The costs – annual and transaction
- CPF approval status (optional)
Another thing to note about funds is that they can be open-ended or close-ended.
- Open-ended is when new units i.e. shares are created and issued as new money comes in from investors, and the units are redeemed when the investor wishes to cash out.
- Closed-ended is when no more new units are being issued.
In summary, the main differences between unit trusts and ETFs lie in their structure, trading, and management style, which can influence factors such as costs, investment approach, and liquidity. As an investor, you should consider your individual circumstance, your investment goals, risk tolerance, and preferences when choosing between these two types of investment funds.
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