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ETFs uncovered: Getting to grips with ‘listed' unit trusts

by , 06 March 2015

Exchange traded funds (ETFs) are very similar to unit trusts.

But instead of buying and selling them through fund managers, you buy and sell ETFs through a stock broker.

So what exactly are ETFs? And why should you consider investing in them?

Read on to find out…

What are ETFs?

If the idea of picking individual shares terrifies you, you could invest in ETFs instead.

ETFs allow you to gain exposure to the general market movements of particular indexes, sectors, overseas markets, bonds and commodities.

An ETF is an investment vehicle that trades on the stock exchange. So in South Africa, you’ll find ETFs trading on the Johannesburg Stock Exchange. The first ETF listed on the JSE in November 2000.

Depending on the focus of an ETF, it will hold different assets. For example, an ETF on the JSE’s Top 40 Index will hold shares in the companies that make up the index.

They trade just like ordinary shares.

Their similarity to unit trusts comes from ETFs mirroring the performance of a particular index, just like many unit trusts allow you to do.

Why trade ETFs?

Advantage #1:
ETFs allow you to easily diversify your portfolio. For example, if you invest in an index ETF, you gain from the different companies listed in that index. This reduces your investment risk.

Advantage #2:
ETFs can be a cost effective way of investing in a number of shares. For example, if you invest in an index ETF of ten stocks, you only pay one set of transaction fees to invest in the ETF instead of ten.

Advantage #3:
You know what you’re investing in with ETFs. You can see what the exact holdings are of each fund.

Advantage #4:
Just like shares, you can buy and sell ETFs at any time during market trading hours.

Advantage #5:
You can trade ETFs using instruments such as single stock futures. And this means you can short sell them too.

So there you have it, getting to grips with ‘listed’ unit trusts.

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ETFs uncovered: Getting to grips with ‘listed' unit trusts
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