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Investing in funds: Weighing up the costs of investing in ETFs and unit trusts

by , 01 September 2015

It's not surprising why so many people like investing in funds.

It removes the need to pick individual shares to invest in and you can easily contribute to grow your investment over the long-term.

The two most common types of funds in South Africa are exchange traded funds (ETFs) and unit trust funds.

So what are the differences between the two types of funds? And which one is cheaper to invest in?

Read on to find out…

The differences between ETFs and unit trusts

ETFs and unit trusts are quite similar funds.

The main difference is that ETFs are listed on the stock market. Their price changes throughout each trading day and to buy them you need to go through a stock broker.

On the other hand, unit trusts aren’t listed on the stock market. Their price only changes at the end of each trading day. You buy them through fund managers.

Another difference is that ETFs tend to be passive. This means they track the performance of a specified underlying index. Unit trusts can either be passive or they’re actively managed. With actively managed funds, a fund manager tries to outperform the fund’s benchmark index.

Which funds are cheaper to invest in?

With unit trusts, the fees you pay are all your costs incurred through investing in them.

On the face of it, ETFs look cheaper as their management fees and expenses tend to be less than that of unit trusts. But these fees and expenses don’t include the costs of investing in them through a stock broker.

A brokerage account has its own costs. This includes transaction costs and commissions for when you buy and sell, and you’ll have to pay an admin fee for your account too.

You can invest through ETFs through companies like etfsa.co.za, but they also charge for any transactions you make.

Picking the best way to invest in funds is really down to you and your investment activities. If you’re an active investor who already has an account with a stock broker, ETFs may work out cheaper. If you don’t have a brokerage account, unit trusts may be the better option.

Bottom line: The fees and costs of ETFs and unit trusts differ greatly depending on what fund it is. Once you know what you want to invest in, shop around and weigh up the costs of each and whether or not you have a brokerage account. You may find one type of fund is more affordable for you than another.

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Investing in funds: Weighing up the costs of investing in ETFs and unit trusts
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