ETFs & Unit Trusts
Despite the wide array of investment instruments available in the investment universe, one may find that it is difficult for him to invest in certain investment products due to capital, accessibility, or time constraints, thus limiting his investable universe. However, with the introduction of ETFs and unit trusts, the impact of this problem has increasingly been reduced. What exactly are ETFs and unit trusts then? Read on to find out!
What Are ETFs & Unit Trusts?
In the previous sections we have covered various investment products such as stocks, bonds, money markets, and alternative investments. ETFs or unit trusts are simply portfolios comprised of several of these individual investment products; hence they are also termed ‘Collective Investment Schemes (CIS)’.Similar to stocks where you own a portion of a company when you purchase some of its stocks, you own a portion of the ETF’s or unit trust’s portfolio when you purchase some of the ETF’s or unit trust’s units! While ETFs trade like stocks on the stock exchange, unit trust units are only bought from and sold to the respective fund managers.
When investors invest in ETFs or unit trusts, their money is pooled together and used to invest in securities in accordance to the funds’ objectives. ETFs typically aim to replicate indices and are passively managed, while unit trusts generally aim to outperform indices and are actively managed. Given that markets can be dynamic and unpredictable, there are times when ETFs outperform unit trusts and unit trusts outperform ETFs. Thus, it is reasonable to conclude that neither is a ‘better’ investment product, and that ultimately, an investor’s preference (should he have one) of one product over the other is usually dependent on the factors he deems more important given that both types of funds bring different benefits to the table! For an easier comparison between both products, we have listed the benefits and drawbacks as per the table below!
| ETFs | Unit Trusts | |
|---|---|---|
| Benefits |
Lower costs Intraday pricing Risks generally do not significantly exceed that of the underlying index. Investors have greater certainty over component securities given that ETFs typically replicate indices. This is unlike unit trusts, where the decision to include or exclude certain securities from the portfolio is usually at the discretion of the fund manager. |
Utilise professional expertise Higher flexibility in selection of portfolio securities Potentially higher returns beyond that of related indices Unit price typically reflects the market value of underlying securities given that it is derived from the NAV of the fund. |
| Drawbacks |
Returns typically do not exceed that of the underlying index Unit price may not reflect the market value of underlying securities. Should there be strong demand for the ETF units, unit price may be higher than the NAV of the fund. |
Higher costs Possibility of risks exceeding related indices |
Why ETFs & Unit Trusts May Appeal To Investors
Here are 5 reasons as to why ETFs and unit trusts appeal to investors in general:
- Diversification benefits. Given that they are portfolios, they essentially provide an investor with an exposure to several instruments at once, thus providing the investor with better diversification through a single investment.This may make forming well-diversified portfolios a more attainable goal given how tedious and time consuming it may be should an investor decide to create a diversified portfolio out of solely individual securities. Aside from time constraints, capital and accessibility constraints may also prevent investors from achieving the same level as ETFs or unit trusts given the number of component securities they can potentially hold.
- Access to a wider range of products that you would not have or may have difficulties gaining access to as an individual investor. Due to the size of trades that ETFs and unit trusts are more capable of carrying out as well as the fact that they are perceived to be more ‘sophisticated’ (particularly for unit trusts) as compared to retail investors, these funds are able to gain access to money market instruments and more complex investment products such as certain alternative assets which are not accessible by retail investors.
- Small minimum investment amount. The minimum investment amount starts from a mere $500 or $1000. You can also start a regular savings plan by investing a smaller fixed amount monthly, starting from just $100 a month. With unit trust, you can use a small sum to buy into a well-diversified portfolio while stocks cost much more for just one lot.
- Simplifies investing for investors who are unsure of how to select individual securities or do not have the luxury of time to do so. By investing in an ETF, an investor is essentially investing in an entire index. Unit trusts on the other hand offer a more active management, where investment professionals select the securities on behalf of investors. Both investment products are great for investors who are just starting on their investment journey and may be unsure of how to select securities, as well as busy investors who may not have the time to select and invest in individual securities!
- Lower risks than individual securities. Should you be concerned about volatility, you can choose a fixed income ETF or unit trust that can give pretty stable returns. Generally, over the medium to long term, these still perform better than your fixed deposits.