There are a number of similarities between unit trust and exchange traded funds but also some key differences.
In both funds you own a share of the underlying investments in line with how much you have invested and how much you can invest in one transaction.
If a unit trust and an ETF track the same index, like the S&P500, the fund’s portfolios will be almost identical.
They are both liquid, transparent and low cost.
If the ETF is a collective investment scheme, the regulation of the underlying fund is the same.
The differences arise on how often the portfolios are priced. An ETF is priced throughout the day while a unit trust is priced once a day, but this should not worry you if you are a long-term investor.
Unit trusts report their holdings less frequently than ETFs, but the reason for this is that active fund managers prefer not to reveal their holdings that frequently. You will, however, always know what an index-tracking unit trust fund is investing in – the constituents of the index.
Providers of index tracking investments may offer an index fund as both an ETF and a unit trust fund, or one or the other, depending on what they think investors want. The choice of which index to track is where you should start and that may dictate which product you use.
If the index you want to track is available as either a unit trust or an ETF, you can compare the costs. You will need to take into account the costs of accessing the fund – either through the unit trust management company for a unit trust or a broker for an ETF, or investment platforms that offer access to one or the other.
When it comes to the performance of a unit trust and an ETF tracking the same index, you should a see similar performance, but it may differ because of:
The difference between the buying and selling price of an ETF on the stock market – known as the bid offer spread.
The size of the unit trust fund and inflows which can affect the custodian and trading costs.
Differences between a unit trust and an ETF
| Unit Trust | ETF | |
| How is it regulated? | Must be registered as a collective investment scheme and subject to the Collective Investment Schemes Control Act | Most ETFs are registered as a collective investment scheme and subject to the Collective Investment Schemes Control Act. Some are not, but they are all listed and subject to the stock exchange’s rules |
|---|---|---|
| Are the underlying securities (shares, bonds or other instruments) held by a trustee or custodian? | Yes, always | Yes, but only if the ETF is a collective investment scheme. If the ETF is not a collective investment scheme, the shares are held independently in, for example, a special purpose vehicle |
| Is it listed on the stock exchange? | No | Yes |
| Is it active or index-tracking? | Most are actively managed but there are a number of index-tracking unit trust funds | All South African ETFs track an index or a commodity |
| How can you invest | Through the unit trust management company or on an investment platform | Through a stockbroker, through an ETF investment platform or a unit trust and ETF investment platform |
| How can you disinvest | You give an instruction to sell to your unit trust management company or platform and you will receive the proceeds in 48 hours | You give an instruction to sell to your stockbroker or platform and the fund will be sold immediately, but you may have to wait three business days for the money to be paid into your stockbroking or platform account. |
| Can you include it in a retirement fund? | Yes, but your investments must comply with the investment guidelines in regulation 28 of the Pension Funds Act | Yes, but your investments must comply with the investment guidelines in regulation 28 of the Pension Funds Act |
| Can you include it in a tax-free savings account? | Yes, but some funds with performance fees cannot be included in these accounts | Yes, but only if the ETF is a collective investment scheme. |
| What are the fees and charges |
You may pay:
Read more: What fees and charges will you pay on your unit trust fund |
You may pay: If you are investing through a stockbroker:
If you are investing through an investment platform:
|
| Transparency | Unit trust funds disclose most of their holdings and asset allocation on a quarterly basis and will disclose full holdings on request | ETFs disclose their holdings daily |
| Dividends | Unit trusts distribute income and dividends regularly and if reinvested these are used to buy more units | ETFs distribute dividends regularly and if reinvested these can be used to buy more ETF units, but it may involve another trade through a stockbroker. Some ETFs are offered on as "total return" investments which means the dividends are automatically reinvested inside the ETF, thereby avoiding the cost of reinvestment. (Note exchange traded notes are different and do not pay dividends) |
| Pricing | Unit trusts are priced once a day only and you will only be told the net asset value at which you have invested the day after you invest | ETFs are priced as they are traded on a stock exchange throughout the day. You can instruct your stockbroker to buy or sell at any time while the market is open |
