ETFs or Unit Trusts: Which Is Better For Your Portfolio?

Written by John Stuart on January 5th, 2016

ETFs or Unit Trusts: Which Is Better For Your Portfolio?

With so many investment choices out there, how do you know you’re making the right one for your portfolio?

Unit Trusts and ETFs have been extremely popular for a number of years…

In fact, I’d go as far to say that they’re probably two of the most popular investment choices in South Africa!

And the debate between which one is better has raged on for just as long…

However, both offer different investment experiences, actions and benefits.

That’s why I’ve decided to compare the two and finally answer this debate once and for all.

So, read on to find out which is better…

 

3 Reasons Why I’d Choose ETFs Over Unit Trusts

 

I’d go for an ETF every day of the weekI fully believe a diversified portfolio should contain both Unit Trusts AND ETFs.

Again, this obviously depends on the investor, but both are great investment vehicles.

Sometimes though, investors are made to choose for whatever reason.

Financial constraints, timing, knowledge…

Whatever it may be, investors are sometimes made to choose between the two.

Now, it’s no secret that I love ETFs.

And if given the choice between ETFs and Unit Trusts, I’d go for an ETF every day of the week.

Here are 3 reasons why…

 

ETF Reason #1: The Cost Factor

The costs associated with ETFs are tiny.

And when you compare them to Unit Trusts, ETFs certainly are a lot more affordable.

When investing in ETFs there are only two types of fees you have to pay.

And on-top of that your total brokerage fee (something you have to pay either way) is significantly lower than when compared to Unit Trusts.

Take a look at this table to see what I mean:

Unit Trusts Vs ETFs - Costs and Fees

I’m sure you’re wondering why Unit Trusts are so much more expensive?

Well, it’s quite simple.

ETFs passively track the movement of a specific index, so there are no research fees associated with them.

Unit Trusts are actively managed, so they require quite a bit of research and hard graft to be put in to find the companies and shares that best suit the funds strategy and requirements.

Strike one for Unit Trusts.

This brings me to the next reason why I prefer ETFs to Unit Trusts….

 

ETF Reason #2: Performance

Studies have shown that only 20% of actively managed funds perform better than their benchmarks.

I don’t know about you, but I certainly don’t want to be lumped into that 80%!

That means on average, 80% of Unit Trusts get it wrong.

Unit Trusts also don’t follow the same weightings as an index, rather the stocks contained in a Unit Trust are subjectively selected by a Fund Manager.

When it comes to ETFs, you also know exactly what you’re investing in.

ETFs usually hold the exact shares and weightings that an index does.

And in doing so they deliver the performance of that index.

Why is this important?

Well, remember that an ETF is passively managed and Unit Trusts are actively managed.

So why take the chance of putting your money into something that potentially comes up second best 80% of the time when you can just invest in ETFs?

 

ETF Reason #3: Flexibility

Because ETFs are exchange traded, that is they trade directly on the JSE (Johannesburg Stock Exchange), they are liquid enough to be able to get you out of trouble when needs be.

This means you can buy or sell ETFs as and when any news or announcements come out that could affect an ETFs price.

Unit Trusts however are a different bag altogether.

If there’s a negative announcement that affects shares, the fund takes a knock.

Why?

Well at the end of each business day the Unit Trust calculates its price based on the net values of the portfolio of assets.

When the fund takes a knock, so do you.

And that’s why I prefer ETFs, they’re more flexible allowing you to avoid negative news if needs be.

 


 

 


 

How To Invest In ETFs Today!

 

There are 3 simple ways you can become an ETF investor today.

You can buy your ETFs through your stockbroker.

For some this might be the easy option, but it’s certainly not the only one available to you.

The second way to buy ETFs is though the actual ETF provider.

Certain companies provide ETFs, these include Absa Capital, Deutsche Bank, Nedbank Capital, Satrix, RMB, Grindrod Bank, STANLIB and Standard Bank.

And you can buy ETFs through some of the companies that provide them.

The other way to start investing in ETFs today is by going through an ETF platform.

If you’re interested in a solid ETF investing platform, have a look at ETFSA or Easy Equities.

For more details on each of these three methods of investing in ETFs, simply click here.

So what are you waiting for?

Until then, here’s to profitable investing. 

John Stuart

John Stuart
Content Director
The Money Lab