ETFs are investment funds listed and traded on a stock exchange. It is a security that tracks the performance of an index, commodity, or basket of assets similar to Unit Trusts and provide investors access to a range of markets and asset classes. You are able to buy and sell an ETF though the stock market just like an ordinary share. ETFs are passively managed by ETF fund managers and do not try to outperform the underlying index.
An ETF can be traded at any time during the trading day at the prevailing market price. A delayed feed of the last traded market price is available on the website throughout the day.
Fund managers of an ETF disclose their portfolio holdings daily making it more transparent.
ETFs are designed to mirror an index and not outperform the market; hence are passively managed by fund managers and have cheaper management fee.
It is a security that buys into a basket of assets (stocks, bonds, and other investment instruments) actively managed by a fund manager. The value of each portfolio is the sum of the value of the investments (stocks, bonds) which they hold. You own a portion of the portfolio when you purchase a 'unit' of it. That's it!
Unit Trusts can only be purchased and redeemed once a day and the price at which you buy (or sell) is based on the "snap-shot" value of all the underlying assets in the fund as at 3pm each day. The daily value of the fund is referred to as the Net Asset Value (NAV).
Fund managers of a Unit Trust report their portfolio holdings on a monthly or quarterly basis.
Fund managers of Unit Trusts will actively manage to beat the market and will have a higher propensity to get better returns.
Why should you incorporate ETFs & UT into your portfolio?
Comparisons between ETFs, Unit Trusts and Stocks
| ETFs | Unit Trusts | Stocks | |
| Listing Status | Yes | No | Yes |
| Trading | Priced and traded continuously throughout the day | Based on forward pricing so one pricing a day, usually available 2 working days later | Priced and traded continuously throughout the day |
| Volatility | Lower as diversification from a basket of stocks cushion the volatility from an individual price swing | Higher as certain events can trigger major share price swings | |
| Management of Investment | Passive management as ETFs seek to replicate the performance of its underlying index | Actively managed by dedicated fund manager who seeks to outperform its benchmark index | Active management by investor to track individual stock's developments and performance |
| Costs / Expense Ratio | Brokerage charges Expense ratios usually below 1% |
No sales charge | Brokerage charges Expense ratios not applicable |
| Liquidity | Yes, but varies according to the individual ETF | Not a concern as fund manager will create or redeem units | Yes, but varies according to the individual stock |
| Diversification Benefits | Yes | No | |
| Counterparty Risk | Cash ETFs: No Synthetic ETFs: Yes Synthetic ETFs - Yes |
No | No |