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If you want to invest in a tracker fund, should you opt for an ETF or a unit trust?

by , 23 September 2014

By investing in a tracker fund, you can benefit from the performance of the market.

For instance, by investing in an exchange traded fund (ETF) or a unit trust tracking the JSE's Top 40 Index, you should see a return mirroring that of the Top 40.

But what's best? An ETF or a unit trust?

Let's take a closer look…

What are index tracker unit trusts?

Index tracker unit trusts work in a similar way to ETFs. They’re also passive funds that track an underlying index.

But the pricing of these works in a different way. As unit trusts don’t have listings on the stock market, their net asset value (NAV) forms the basis of their value.

This means the value of the underlying portfolio drives the price you pay for a unit in a unit trust.

The pricing of ETFs and unit trusts works slightly differently

This is different to ETFs as their share prices are determined by supply and demand for shares in the fund.

This means that with ETFs, the share price may trade higher or lower than the NAV of the fund. In other words, at a premium or at a discount, Phil Oakley in Money Week explains.

Generally speaking, this shouldn’t happen as the active participants regulate the price of an ETF. They can create new shares or redeem existing shares to bring this supply and demand into balance. But it does happen.

This is especially the case if the ETF has exposure to foreign shares. They may trade a different times to the JSE. Or if the ETF holds bonds that aren’t very liquid.

So this sometimes causes the price of an ETF to slowly adjust to its underlying NAV. So when you buy an ETF, make sure you’re not paying over the odds.

Is a tracker unit trust a better option?

You’ll tend to find that ETFs are generally cheaper in the long run. Once you’ve paid your stockbroker fees and commissions, you don’t pay to own them like you do with unit trusts.

Over the long-term an ETF tends to offer you better value than an index tracker unit trust.

So there you have it, why if you want to invest in a tracker fund an ETF can be the better option.

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If you want to invest in a tracker fund, should you opt for an ETF or a unit trust?
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