Unit trusts are very different from ETFs. Both can have a place in your portfolio.
- A Unit Trust (Mutual Fund) is a regulated investment vehicle which pools together the funds of many investors.
- A professional investment manager uses the pooled money to invest in a selection of underlying assets according to the unit trusts investment objectives.
- The underlying assets earn capital growth and/or income. The returns are shared among investors.
- Each unit trust is split into equal portions called units - like pieces of a pie.
- When you invest into a unit trust you buy units, not shares.
How do Unit Trusts differ from ETFs?
- A Unit Trust is an actively-managed investment tool. Like an ETF, it has many securities beneath it, but the two differ in how the funds are created.
- With a Unit Trust, individual investors pool their money into a Unit Trust, and then the fund manager oversees the fund by investing in individual securities, such as stocks or bonds. In turn, the investors of the fund earn proportional ownership of the fund.
- Investing in a Unit Trust is betting on the managers ability to pick the best securities, the winners, and therefore perform better than the market.
- Because of their higher cost structure, Unit Trusts need to return 1% to 2% more per annum in order to match net-of-fees returns of passive funds.
- Unit Trusts are bought and sold through private channels.
This is very important, as it determines the fees. When something is actively managed, fees will naturally be higher. Within the rules of the unit trust, fund managers do stock-picking or asset-picking. That is much harder than passive investing like ETFs.
Passive investing is different. Investors who build portfolios with ETFs are more concerned with the broader picture of long-term returns for an asset class, and less concerned with beating the market by picking the best stocks. Because an ETF tracks an index, its investment strategy is very clearly laid out by the choice of index and the execution is very cost-effective, as no decision-making is needed.
Asset Class Composition
Unit Trusts provide the flexibility to build a portfolio of your choosing without being constrained to a specific tracking function. You can have a portfolio of stocks, properties, cash etc. The possibilities are endless. You trust the fund managers to choose the best assets that will beat the market within the given rules of the fund.
ETF offers diversified exposure to a particular asset class at a low cost. ETFs limit your exposure to a specific asset class, often equities OR properties.
What investment product is right for you?
Both have their positives and negatives. Both can have a place in a portfolio, but only you can make the final decision.
I personally prefer ETFs, but that is just a preference because I hate fees.