Asked on 03 Apr 2019
If you prefer lower investment minimums, an ETF is more suitable for you. Investors can buy an ETF for the price of 1 share (ETF's market price). Depending on the ETF, the price could range from as low as $50 to a few hundred dollars. Whereas, a mutual fund isn't based on the fund's share price. It is a flat dollar amount, most mutual funds have a $1,000 minimum that buys investors 10 shares of a hypothetical fund with a net asset value (NAV) of $100 per share.
ETF provide investors real-time pricing and allows investors to use sophisticated order types that give the most control over the price. However, in a mutual fund, regardless of the time of day you place the order, you will get the same price as everyone else who bought and sold on that day. This price isn't calculated till after the trading day is over.
ETFs typically track a specific market index whereas mutual funds are actively managed to buy or sell assets within the fund where fund manages attempt to beat the market and help investors profit.
Personally, I started off investing in ETFs as it has a lower investment minimum and ETFs could be bought through virtually any online brokers whereas mutual funds were not always available through all brokers. Since I was focused on building wealth over the long time, the liquidity of ETFs are compared to mutual funds was another reason I choose ETFs over mutual funds.
ETFs are highly recommended, there is almost no reason (with very rare exceptions)
to still invest in Unit Trusts/Mutual Funds. On average the UT fees are much higher than those of the ETFs plus evidence by studies confirms, that active mutual fund managers cannot beat the market index robustly over the longterm. With higher fees You loose performance. So UTs (incuding Index UTs) have no advantage compared to passive index ETFs.
more on my thinking here:
Beginner is a little vague. And better is also a little vague.
If you want to replicate the returns of the S&P 500 for example, using an ETF instead of an Index Fund would be cheaper, thus better.
But that's the assumption that you know you want to invest in the index and what that means for your portfolio.
I think a beginner first should understand asset allocation and risk management in a portfolio.
Then, by knowing what exposure they want in their portfolio, choosing the relevant instrument to achieve such exposure.
For example, if I want exposure to US High Yield Corporate Bonds, I know that choosing a mutual fund rather than a similar ETF would give me better returns because of how the ETF functions as compared to the fund.
But that's only understanding that I want that exposure in the first place.
But if you want exposure to Singapore Blue Chip stocks, I can only choose the STI ETF, because we don't have a similar Unit Trust that would be a more cost effective solution.