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ETF Vs. Unit Trust: Choosing the Better Investment

ETF Vs Unit Trust
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One of the best yet oldest adages in the world is to plant a tree, take care of it, and benefit from its fruit. The modern version of this proverbial tree is investing. The steps are similar: save enough money, put it in investment vehicles that can yield higher outstanding returns in the future, and benefit from the returns you’ll receive.

For many investors, both exchange-traded funds (ETFs) and unit trusts have become highly popular assets because they guarantee higher returns than mutual funds. Plus, they have their respective fund managers and are easily accessible in Singapore’s stock exchange. Learn more about both of these investment products to help your investment strategy in terms of each one’s pros and cons, fee, expense ratio, and other trading costs. 

Continue reading to learn more.

 

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are a type of security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. They may be attractive to investors because they offer diversification and low cost.

An exchange-traded fund invests in a portfolio of stocks, bonds, or commodities. For example, an ETF may invest in stocks from the S&P 500 index, meaning your ETF contains assets from Apple, Walmart, Microsoft, Procter & Gamble, and other blue-chip US companies.

ETFs are passively managed funds that are traded on the stock market. Their prices change throughout the day and earn money for investors depending on their net asset value (NAV)’s existing valuation during the trading day. ETFs are easily traded just like stocks, allowing investors to buy and sell them at any time of day.

Pros

  • Easier to create and manage: ETFs are traded on an exchange, meaning that ETFs are easier to trade than unit trusts.
  • More cost-effective: These assets are liquid, can be traded on various exchanges, and bought and sold throughout the day.
  • Tax-efficient: Exchange-traded funds (ETFs) are typically more tax-efficient than mutual funds because the ETF has a higher turnover rate. Higher turnover rates result in more frequent distributions, which can lead to higher dividends and capital gains.

Cons

  • ETFs are not actively-managed funds: A fund without active portfolio management is a fund that does not have a manager who will actively analyze and select investments to implement specific investment objectives.
  • Not the best single stock substitute: ETFs may trade at prices that are more or less than their NAV, making them an imperfect substitute to individual stocks
  • More complex than mutual funds: While mutual funds hold the underlying securities where the funds are invested, ETFs do not. Mutual funds have a specified number of authorized shares and have a specified share price, both of which ETFs do not have.

 

Unit Trusts

Unit trusts are investment funds that an external company manages. These funds invest in a variety of assets such as bonds, stocks, and currencies, just like ETFs. They are not available to the retail investor and aren’t open to public trade.

There are two main types of unit trusts: open-ended and closed-ended.

1. Open-Ended Funds

Open-ended funds are constantly being created and redeemed by the fund manager. They are a pooled fund that invests in a range of different underlying assets. They are often used by investors seeking a more diverse portfolio with minimal upfront capital.

2. Closed-Ended Funds

Closed-end unit trusts are investments in a company or fund. They are valuable because they offer a limited supply that can be traded. The company or fund issues the stock to investors who then trade them themselves. The company or fund will then buy back the shares offered by investors, which means there is always demand for these investments.

Pros

  • Diversified assets: Diversified portfolios ensure reduced volatility and improved stability than ETFs
  • High-quality actively-managed mutual funds: Active fund management ensures that fund managers make informed decisions about asset allocation and portfolio imbalance. A fund manager generally guarantees better decisions than passively-managed funds.
  • Transparent underlying investments: Unit trusts are managed by a professional who invests in the assets on behalf of the fund. Laws in virtually every country require unit trusts to disclose their holdings quarterly and annually.

Cons

  • All holdings are the same until maturity: Unit trusts are designed to be invested for a period of time and then terminated. As such, unit trust holdings remain the same until the termination date.
  • Higher fees: Unit trusts are managed by professional fund managers, which means it has a higher fee that can take out too much from an investor’s earnings over time.
  • Limited buying and selling opportunities: Unit trusts aren’t publicly-sold assets, meaning you’ll need to have connections to learn about new unit trusts.

 

Man Holding Investment Graph

Key Differences

Let’s look at some key differences between the two assets:

An ETF is a type of investment vehicle that owns the underlying stocks from an index, like the S&P 500 or FTSE 100. They are publicly traded and are passively managed. They are highly liquid because investors can buy and sell them like stocks.

Alternatively, unit trusts also invest in stocks, but their shares are not traded on public stock exchanges. A fund manager actively manages, which increases its annual and entry fees. Lastly, the trust’s unit prices depend on its general performance throughout the period.

Here’s a table showing the major differences between the two assets.

Financial Instrument Where to Buy and Sell Composition of Assets Management Type 5-Year Average Returns (Non Guaranteed) Annual Fees Entry Fees  Liquidity
ETFs Public Market Non-Diversified Passive 90-120% 0.05%-0.7% S $10-S $20 High because it’s bought and sold like a stock
Unit Trusts Private Channels Diversified Active 95-110% 1.5% on average 3-5% of valuation High fees restrict frequent buying and selling by investors

 

The Best Performing ETFs Today

Let’s take a look at some of the best-performing ETFs today

1. SPDR STI ETF

The SPDR STI ETF is an exchange traded fund that tracks the performance of the Straits Times Index.

The ETF’s investment objective is to track the performance of the Straits Times Index, which measures the performance of the Singapore economy. The ETF is a passively managed index that seeks to replicate the price and yield performance of the Straits Times Index. The Straits Times Index does not contain any financial or real estate stocks.

Five-year performance:

  • 2017: +5.3%
  • 2018: +4.7%
  • 2019: +8.8%
  • 2020: +10.6%
  • 2021: +6.7%

 

2. Lion-OCBC Securities Hang Seng Tech US$

The Lion-OCBC Securities Hang Seng Tech US$ ETF invests primarily in Chinese technology stocks. It is a passively managed fund, which is designed to track the performance of the Hang Seng Technology Index. These include China’s prominent companies, such as China Longyun Software, China Telecom Corp, China Unicom Hong Kong, China Life Insurance, and others.

Five-year performance:

  • 2017: +24.9%
  • 2018: -11.9%
  • 2019: +0.1%
  • 2020: +2.5%
  • 2021: +4.1%

 

3. SPDR Gold Shares ETF 

SPDR Gold Shares is the largest gold ETF. It is a bullion-backed ETF, which is designed to reflect the price of gold bullion, less the expenses of the trust.

Guide: Gold bullion ETFs offer an alternative investment to traditional investment vehicles. They are typically traded on the stock market rather than physical gold, allowing investors to buy and sell their shares easily. Also, gold bullion ETFs allow investors to invest in gold without worrying about storing the physical gold.

Five-year performance:

  • 2017: 7.2%
  • 2018: 5.2%
  • 2019: 3.7%
  • 2020: 12%
  • 2021: N/A

 

Stock Market Graph

The Best Performing Unit Trusts Today

Here are some of the best unit trusts you can find today.

1. Aberdeen Singapore Equity Fund

The Aberdeen Singapore Equity Fund invests in stocks of companies that are domiciled in Singapore or have significant exposure to Singapore. The unit trust regularly invests in financials, industrials, information technology, consumer discretionary, consumer staples, healthcare, and others. The fund leans towards small and mid-cap companies.

Five-year performance:

  • 2017: 24.1%
  • 2018: -5.4%
  • 2019: -1.2%
  • 2020: 2.8%
  • 2021: 9.4%

 

2. Franklin Global Securities

Franklin Global Securities is a full-service brokerage firm that offers a wide range of services, including investment advice, investment management, securities trading, and personal financial planning. it invests in equities, fixed income assets, and cash. Franklin Global Securities does not disclose its investment holdings except only to its investors.

Five-year performance:

  • 2017: 2.3%
  • 2018: -1.2%
  • 2019: 0.4%
  • 2020: 3.2%
  • 2021: N/A

 

3. United Asia Pacific Real Estate Income Fund

The United Asia Pacific Real Estate Income Fund was established in 1999 to provide investors with an opportunity to invest in the long-term appreciation potential of Asian real estate markets.

The United Asia Pacific Real Estate Income Fund typically invests in the securities of Asian real estate investment trusts, which are companies that own and manage income-producing real estate in Asia. The fund also invests in securities of companies engaged in various activities related to the ownership, management, and development of real estate.

Five-year performance:

  • 2017: +25.06%
  • 2018: -8.35%
  • 2019: +11.10%
  • 2020: +8.55%
  • 2021: +21.04%

 

ETF vs. Unit Trust: Finding The Right Investment

All financial instruments are beneficial if you invest in them at the right time with the right volume. However, investors must always ensure they have accounted for these four crucial aspects of effective investing.

1. Investment Goals

Investment goals state what a person wants to achieve from the market. There are many ways to profit from the stock market, and the investor’s goal determines which strategy they will use.

For example, an investor who wants to have a diversified portfolio will buy various stocks from different industries. This is different from an investor that wants to make as much as possible as quickly as possible, who would buy stocks only from companies with good potential for large gains.

2. Time Horizon

Time horizon is important for maximizing profits from the stock market because it determines the number of trades that can be made.

Someone with a long time horizon, for example, could sell a stock they buy today and then buy it back in a year or two when it is cheaper.

3. Investment Diversification

Investment diversification refers to the practice of dividing your portfolio among various asset classes, such as stocks, bonds, and cash.

The purpose of diversifying your investments is to protect your portfolio from risk. When you invest in multiple asset classes, you share your risk with the different combinations of investments.

For example, if you invest in stocks and bonds and one of those asset classes decreases in value, the other might increase in value and balance out the losses.

4. Risk Tolerance

Risk tolerance is the degree to which an individual is willing to tolerate uncertain investment results. Individuals with lower risk tolerance want to reduce risk exposure as much as possible. For example, an individual who has S $100,000 in retirement savings may be willing to invest only S $5,000 of the funds in stocks, while investing the remaining $95,000 in safer investments like bonds or CDs.

 

How to Buy a Unit Trust or ETF in Singapore

In Singapore, you’ll need your SingPass and relevant documents to register using an online or traditional broker. Most banks and online brokers have a great selection of ETFs in their respective platforms. On the other hand, they may also house brokers with unit trusts, so make sure to watch out for unit trusts you would like to trade.

 

What Are the Best Platforms for Trading ETFs?

Here are some of the most famous trading platforms in Singapore today.

1. Saxo Markets

Saxo Markets is a European online trading and investment company, headquartered in Copenhagen, Denmark. The company provides trading and investing services to private and institutional customers worldwide, including securities trading, currency trading, commodities trading, and derivatives trading.

Saxo markets also provide online market data, news, and tools for professional investors.

2. Tiger Brokers

Tiger Brokers is a Singapore-based online trading brokerage company and provides retail clients with stock and futures trading services. 

The platform provides stocks, forex, commodities & indices trading for private and institutional clients regarding its assets. 

3. POEMS by Phillip Capital 

POEMS by Phillip Capital is an online trading platform that offers trading in stocks, CFDs, ETFs, and other products. They offer competitive rates on various products, useful technical analysis tools, a news ticker, and a reliable customer service team to help with any difficulties.

 

Conclusion

Both ETFs and unit trusts have their respective pros and cons, but each one can outshine the other if investors use either of them at the right time with the right volume. 

  • ETFs are a collection of individual company shares that focuses on certain indexes, such as the S&P 500, publicly sold in exchanges, and are passively managed.
  • Unit trusts are a collection of assets actively managed by fund managers. They’re greatly diversified, but have higher fees and lack liquidity because they are privately traded.
  • Both ETFs and unit trusts can help you increase your portfolio value if you invest in either of them with proper timing and volume.

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