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What is the most cost effective option for you, ETFs or unit trusts?

by , 20 March 2015

If you're looking to invest in a fund that tracks an index, you have two choices. You can invest in an exchange traded fund (ETF) or a unit trust.

Since their introduction in November 2000, one of the often cited benefits of ETFs is they're cost effective. This goes against their unlisted counterparts, the unit trusts, which often receive criticism on the costs involved.

But which is the cheaper option?

It all depends on your investment habits…

ETFs perhaps aren’t as cost effective as you believe

ETFs are collective investments that are listed on the stock market, the experts at the South African Investor explain. In other words, they act like many unit trusts, which don’t have listings on the stock market.

But just like unit trusts, ETFs come with costs. And you may not have considered some of these costs when you look at investing in ETFs.

Recently, the CEO of Sygnia, Magda Wierzychka, told MoneyWeb that if you compare the costs between investing in ETFs and unit trusts, “ETFs are ‘three to four times more expensive’ than unit trusts that track the same index”.

So is investing in ETFs more expensive?

The higher costs associated with investing in ETFs comes from having to conduct your buying and selling through a stock broker, Patrick Cairns in MoneyWeb highlights:

  • You need to pay brokerage for each transaction you make. This will depend on who you trade through as different brokers have different fees and fees structures.
  • To keep your account open, you also have to pay a fee, which you need to take into consideration.
  • And then there’s the bid-offer spread. This is the difference between the price you can buy an ETF at and sell it at. And for some ETFs, this can be wide.

It really comes down to your investment habits. If you’re an active investor, you’re paying those costs anyway. If you only open an account with a stock broker to buy ETFs through, it does add to your costs.

And just as with investing in shares, the more you invest in one transaction, the more cost effective it is.

If you’re weighing up whether to invest in an index tracking ETF or unit trust, you need to consider the costs depending on how you already trade. If you don’t have a brokerage account and want to invest in an index tracker over the long haul, unit trusts could be the more cost effective option for you.

Bottom line: As with all investments, fees have an impact on your returns and you need to consider them.

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What is the most cost effective option for you, ETFs or unit trusts?
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