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How to decide between ETFs and unit trusts

by , 27 November 2015

If you want to invest in tracker funds, you have two options available to you. You can invest in exchange traded funds (ETFs) or you can invest in passively managed unit trusts.

So which is the best option for you?

Read on to find out more…


The differences between ETFs and unit trusts

 
There are a lot of similarities between ETFs and unit trusts.
 
Both these types of funds track an underlying market or index, for example the JSE Top 40 Index.
 
By investing in these tracker funds, you benefit from the performance of the market.
 
But there are some key differences between ETFs and unit trusts…
 
  • ETFs are listed on the stock market, whereas unit trusts aren’t.
  • Due to ETFs being listed, their share price changes according to what’s going on in the market, the price of unit trusts is only determined at the end of each trading day.
  • There is also a difference in the way you invest in these funds.
 

The main consideration when deciding between ETFs and unit trusts

 
When deciding on which type of tracker fund is for you, the main deciding factor is cost.
 
With unit trusts, you pay an initial fee plus an annual management fee. With ETFs, you pay a transaction charge (for example, commission to your broker) and also a management fee. 
 
You can see how much these management fees will cost you by looking at a fund’s total expense ratio (TER).
 
There can be a bit of a difference in fees, with unit trusts tending to cost more, but you need to consider your circumstances.
 
If you decide to invest in ETFs, you’ll need to use a stock broker to buy into the funds. A stock broker will charge you for buying into ETFs, plus you will have to pay other fees for having an account with your stock broker.
 
If you already invest in shares and have an account with a stock broker, ETFs may work out the cheaper option. But if you don’t have an account with a stock broker, unit trusts may work out the most cost effective option.
 
So there you have it. How to decide between ETFs and unit trusts.
 
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