Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio? May 20, 2024

Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly delectable dishes. However, you have a limited budget and you can only afford to order one dish.

This situation is frustratingly similar to being new to investing and overwhelmed with the variety of investment options in the market. With a limited budget, you will need to carefully weigh the pros & cons of each investment product before you make your investment decision.

Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?


What are Unit Trusts and ETFs?

Unit trusts and ETFs are both funds. In simple terms, a fund is usually a basket of assets that offers diversification to investors.

Unit Trusts: Also known as mutual funds, Unit Trusts are a form of investment for which professional fund managers pool investors’ monies together to invest in a diversified portfolio of assets. A typical unit trust consists of bonds, stocks, and other types of securities.

Fund managers aggregate the value of all the different types of assets they invest in and generate a Net Asset Value (NAV). This NAV represents the value per unit of the fund, which is also the price at which it is traded. The performance of a unit trust generally depends on the fund manager’s ability to generate returns above a benchmark index.

Exchange-traded funds (ETFs) are open-ended investment funds listed and traded on a stock exchange. They aim to track or replicate the performance of an underlying index or asset. ETFs provide access to a wide variety of markets and asset classes.

The price of ETFs is determined by the value of their underlying asset and the market demand and supply of the ETF, while their performance depends on the respective index that the ETF tracks.


What are the differences between Unit Trusts and ETFs?

Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

1. Passive vs. Active Management

Passive Management refers to an investment style whereby the objective is to track or “mirror” an established index like the Singapore Straits Times Index (STI) or the US S&P 500 Index. This is the opposite of Active Management, which involves active screening and selection of stocks, bonds, or other securities to meet an investment objective or outperform a benchmark.

Unit trusts are typically managed by experienced fund managers who use their expertise to make discretionary investment decisions, aiming to outperform the market or a specific benchmark. In contrast, ETFs are more commonly associated with a passive management style, primarily focusing on tracking indexes.

Unit Trusts ETFs
Typically employ active management strategies, with fund managers actively managing assets according to a specified investment strategy aimed at outperforming a benchmark Usually adopt passive investment strategies, focusing on tracking or replicating indices

Whether you should adopt a more active or passive approach depends on what you’re investing in and your knowledge about the markets. For example, given their smoother flow of capital, developed markets might be well-served by passively managed options. On the other hand, active management could give your portfolio an edge in emerging markets where efficiently picking stocks may have a more significant impact.


2. Exchange vs. Non-exchange Trading

Unit trusts are not traded on an exchange and are “forward priced.” Forward pricing is used to determine the price of a fund’s “units” based on the end of day net asset value (NAV) of the fund. Transactions typically use a single daily “dealing price”; and the transacted price or NAV is known about two business days after the purchase is made.

As the name suggests, ETFs are traded on a stock exchange which allows for real-time price dissemination and transactions. The price of an ETF is influenced by a combination of market demand and the performance of the underlying index that the ETF is tracking.

Unit Trusts ETFs
Not transacted via an exchange; buying and selling are usually based on a single daily “dealing price.” After transacting, the price/NAV is known roughly 2 business days later due
to “forward pricing.”
Transacted on a stock exchange; buying and selling ETFs is similar to buying and selling stocks.

Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?


3. Upfront Costs

These costs can add up, especially with smaller investment amounts. Since ETFs typically require the purchase of whole shares, frequent commission fees can chip away at your returns. In contrast, Unit trusts allow you to invest any amount, thereby minimising the impact of these fees.

Unit Trusts ETFs
When you invest online independently, you may transact with as little as zero sales charge. However, prior to investing on your own, you must pass our Customer Knowledge Assessment. Investing in ETFs incurs a brokerage charge similar to trading stocks. Additionally, there may be a minimum brokerage fee per transaction, applicable to both buying and selling.


4. Tax Considerations

Unit Trusts ETFs
When a unit trust fund receives dividends from its underlying investments, these are usually tax-exempt for investors. ETFs listed outside of Singapore might incur a layer of tax complexity when dividends are issued.


Conclusion

If you’re a new investor in Singapore with a smaller budget, unit trust funds might be your perfect gateway to the world of investments. Their flexibility in terms of investment amount, potentially simpler tax structure, and the option for active management in specific markets make them a compelling choice. Are you ready to explore the delicious world of unit trust funds and start building your financial future?


Contributor:

Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

Winshern Ho
Wealth Manager
Phillip Securities Pte Ltd (A member of PhillipCapital)
https://bit.ly/TTPWinshernHo

Disclaimer

These commentaries are intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. Investors may wish to seek advice from a financial adviser before investing. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the investment is suitable for them.

The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.

Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.

About the author

Winshern Ho
Wealth Manager

Winshern Ho is a wealth manager, investor, and enthusiastic traveller. His interest in the financial markets was ignited by the 2008 financial crisis. With his extensive experience, Winshern helps his clients navigate their financial paths effectively.

He relies on well-established strategies to develop clear, practical financial plans. These plans focus on achieving long-term goals rather than pursuing short-term gains.

Additionally, Winshern is the founder of a start-up. His goal is to inspire more people to take control of their finances, understand what drives their financial decisions, and equip them with the skills and knowledge they need for financial stability and happiness.

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  

 

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com