Unit Trusts or ETFs - Definitely ETFs!
In the last three weeks, one question constantly comes up in conversation with my friends, “What do you prefer, unit trusts or ETFs (Exchange Traded Funds)?”
My quick answer is always ETFs. But then I'm bombarded with follow up questions asking, “What's the difference and why do you like them so much?”
So, today, I want to put these questions to rest and explain once and for all, why I prefer ETFs to unit trusts.
Let's start with an explanation...
The difference between unit trusts and ETFs
A unit trust is a collection of shares selected by a portfolio manager. With a unit trust, you can buy shares in the fund and gain exposure to a collection of stocks without having to buy each one separately.
is like a unit trust on steroids. It’s a basket of shares that are traded directly on the stock exchange and not controlled by a fund management company.
This alone holds a certain appeal for me. Let me explain why...
Three reasons why ETFs beat unit trusts every time
1. There’s no comparison on fees – ETFs beat unit trusts hands down
Because a unit trust is managed by an investment firm, you can expect to higher management fees. The fee at benchmark is 1.5% excluding VAT. But if you include Vat it becomes 1.71%, which is very high.
Now you might be thinking that the higher fees mean better results. You’ll be wrong...
Less than 15% of all unit trusts beat their own benchmarks... That’s a dismal performance.
Index-based ETFs only cost 0.35% and 0.65%.
2. ETFs offer better tax benefits
ETFs don’t have to play by the same tax rules that apply to unit trusts. When the markets are tough, like they are at the moment, unit trusts are forced to sell shares to keep performance levels up. Selling shares triggers capital gains taxes. This is passed on to the shareholders.
ETFs can also earn capital gains but the problem is less severe than with unit trusts. With ETFs, you can choose which shares to sell to minimise tax consequences.
3. Flexibility in managing your own shares
When you invest in unit trusts, you can only access the shares offered by the fund management company. This isn’t always ideal.
Investing in ETFs simplifies portfolio management and asset allocation. With ETFs, you can hold all of your funds with one broker, making it easier to increase to balance your portfolio between stocks and bonds.
So, there you have it. Three reasons why I prefer ETFs to unit trusts... It’s a no brainer.