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Anonymous

05 May 2020

General Investing

What is the difference between a Unit Trust and a ETF?

I don't quite understand this, been often very confused with these terms in the market. Which one is better or are there pros and cons.

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Discussion (1)

Luke Ho

15 Oct 2018

Founder and Director at CFX Money Maverick Pte Ltd

A unit trust is typically either a straight out Mutual Fund or Fund in Fund - they invest directly into the stocks and are managed by an active fund manager, who trades on a regular basis to achieve very specific objectives. Unit trusts typically are benchmarked against a certain index, which indicates market performance.

An ETF tracks and replicates the index of that market instead. So if the STI is representative of Singapore's market performance, the STI ETF will track that to the best of it's ability.

As of 2018, the facts are these:

ETFs

1) Unit trusts have significantly higher costs than ETFs (a average yearly expense ratio of about 1.5% versus 0.7%)

2) Unit trusts typically do not outperform efficient or first world markets (e.g US, Japan).

3) Unit trusts are not as effective for trading.

Unit Trusts/Mutual Funds/FnF

1) Instead of beating the market, Unit trusts can achieve better return-risk ratios and Sharpe ratios than ETFs - you may end up with a lower annualized return for much lower volatility.

2) Unit trusts can (easily, if you go with me) outperform ETFs in inefficient markets net of fees (e.g. India, Thailand), as well as Fixed Income markets (e.g. Bonds and Bond Funds)

3) Unit trusts give you guaranteed liquidity in the event of a crisis

The short answer is that there are pros and cons, and are better for different people in specific situations.

I offer and understand both quite well as an investment specialist, so you can always drop me a message if you would like to learn more or start your journey right. :)

https://www.facebook.com/luke.ho.54

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