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

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

Both Unit Trusts (also known as Mutual Funds in the United States) and ETFs (Exchange-Traded Funds) are examples of Collective Investment Schemes (CIS), which refers to an investment fund managed by a professional fund manager, with money pooled together with other investors. They can potentially invest in different assets such as equities, bonds or cash, and across different geographies as well as sectors. While both Unit Trusts and ETFs enable investors to diversify their portfolio, there is a perennial debate on which is a better investment vehicle. In this article, we break down the key differences between these two products.

 

What is an ETF?

An ETF is usually a passively managed fund, comprising a basket of securities that tracks an underlying index in the market. It trades on a public exchange with intraday price share fluctuations, similar to a regular stock, as the shares are being bought and sold1. A couple of most commonly traded ETFs include SPDR S&P500, iShares MSCI Pacific ex Japan ETF and Vanguard FTSE Emerging Market ETF.

The most commonly-cited benefits of ETFs include their potentially low-cost, transparent and tax-efficient structure.

Examples of ETFs on our shelf include Lion-Phillip S-REIT ETF, Lion-OCBC Securities Hang Seng TECH ETF, Lion-OCBC Securities China Leaders ETF and Lion-OCBC Securities Singapore Low-Carbon ETF.

 

What is a Unit Trust?

Generally, a Unit Trust is an actively managed investment fund. Individual investors’ money is pooled together in a Unit Trust, and the fund manager has the discretion to invest in different assets such as stocks and/or bonds,2. Fund investors have proportional ownership of said fund.

We have over 50 Unit Trusts on our shelf, including LionGlobal Disruptive Innovation Fund, LionGlobal Singapore Dividend Equity Fund, LionGlobal Asia Pacific Fund, and LionGlobal Short Duration Bond Fund.

 

What are their Key Differences?

There are a few distinct differences between these two products.

 

1. LIQUIDITY

ETFs are traded on an exchange, and their units can be bought and sold intraday during trading hours. Unit Trusts are subscribed and/or redeemed once a day after market close. Each buy and/or sell trade will be executed at the next available net asset value (NAV) that is calculated after close of market.

 

2. FEES

Unit Trusts are often known to have higher costs than ETFs. To start, Unit Trusts typically have higher management fees that contribute to a higher total expense ratio (TER) than ETFs. A TER for active Unit Trusts can range between 1.5% to 2.5% per annum (p.a.), while that of ETFs can be below 0.5% p.a.3.However, that may not always be the rule of thumb. A case in point will be the LionGlobal All Seasons Fund that has a TER capped at 0.5% p.a, in our mission to promote low-cost investing among investors. For Unit Trusts, there are also fees involved such as initial sales charges, switching fees, redemption charges and recurring fees. Again, there are also exceptions with a Singapore digital platform charging 0% sales or redemption charge.

 

3. MANAGEMENT STYLE

While most ETFs are passive in nature, we have seen a growth of actively-managed ETFs of late. For active ETFs, fund managers have the discretion to pick and trade stocks to generate returns. Unlike passive ETFs that serve to replicate the performance of a given index, an active ETF aims to beat its performance.

In contrast, while most Unit Trusts are actively managed in Singapore, there are also passively-managed Unit Trusts such as the LionGlobal Infinity U.S. 500 Stock Index Fund that follows the performance of the US stock through investment as a feeder fund in the Vanguard® U.S. 500 Stock Index Fund.

 

Conclusion

Depending on an investor’s individual goals, time horizon and risk appetite, both unit trusts and ETFs have a place in your ultimate asset allocation.

 

1Source: Investopedia, “ETF vs Mutual Fund: What’s the Difference?”, 25 March 2022

2Source: Moneysense, “Understanding unit trusts”, 29 October 2018

3Source: Endowus, “The real difference between unit trusts and ETFs”, 14 May 2021

 

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This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. It is for information only, and is not a recommendation, offer or solicitation for the purchase or sale of any capital markets products or investments and does not have regard to your specific investment objectives, financial situation, tax position or needs.

You should read the prospectus and Product Highlights Sheet of the relevant fund which are available and may be obtained from Lion Global Investors Limited (“LGI”) or any of its distributors, consider if a fund is suitable for you and seek such advice from a financial adviser if necessary, before deciding whether to invest in the fund. Applications for units in our funds must be made on forms accompanying the prospectus.

Investments in our funds are not obligations of, deposits in, guaranteed or insured by LGI or any of its affiliates and are subject to investment risks including the possible loss of the principal amount invested. The performance of a fund is not guaranteed and the value of units in a fund and the income accruing to the units, if any, may rise or fall. Past performance, payout yields and payments as well as any predictions, projections, or forecasts are not necessarily indicative of the future or likely performance, payout yields and payments of a fund. Any extraordinary performance may be due to exceptional circumstances which may not be sustainable. Dividend distributions, which may be either out of income and/or capital, are not guaranteed and subject to LGI’s discretion. Any such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value of the fund. Any references to specific securities are for illustration purposes and are not to be considered as recommendations to buy or sell the securities. It should not be assumed that investment in such specific securities will be profitable. There can be no assurance that any of the allocations or holdings presented will remain in the fund at the time this information is presented. Any information (which includes opinions, estimates, graphs, charts, formulae or devices) is subject to change or correction at any time without notice and is not to be relied on as advice. You are advised to conduct your own independent assessment and investigation of the relevance, accuracy, adequacy and reliability of any information or contained herein and seek professional advice on them. No warranty is given and no liability is accepted for any loss arising directly or indirectly as a result of you acting on such information. The fund may, where permitted by the prospectus, invest in financial derivative instruments for hedging purposes or for the purpose of efficient portfolio management. The Fund’s net asset value may have higher volatility as a result of its narrower investment focus on a limited geographical market, when compared to funds investing in global or wider regional markets. LGI, its related companies, their directors and/or employees may hold units of a fund and be engaged in purchasing or selling units of a fund for themselves or their clients.

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Comparing the TER cost for 20 years

Here’s the difference a low cost advantage makes to cost savings

Here's how much you pay

$190,272.13
Selected TER 1.00% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $90,359.56 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 2 years and 6 months.

Here's how much you pay

$271,950.61
Selected TER 1.50% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $172,038.04 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 4 years and 9 months.

Here's how much you pay

$345,744.19
Selected TER 2.00% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $ 245,831.62 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 6 years and 9 months.

TER (Total Expense Ratio) is the sum of various identified operating expenses charged on an ongoing basis to the fund’s assets as a percentage of the fund’s average net asset value calculated over a 12-month period at the close of the annual and semi-annual financial statements of the fund for all the p.a. tabs (1.0%, 1.5%, 2.0%).

The above scenarios are for illustration purpose only. Past performance, as well as any prediction, projection or forecast on the economy, securities market or the economic trends of the markets are not necessarily indicative of the future or likely performance of the funds. Calculations based purely on costs with no market movement or investment returns.