If you read a lot of material about unit trusts, ETFs and mutual funds you will find that very little distinctions are made between these three different types of collective investment schemes. The fundamental differences that are often highlighted is in regards to the fees and the style of management as to whether the fund is actively or passively managed. Perhaps another distinguishing factor which can be made is in reference to how they are priced, if it is based on the net asset value (NAV) or if its traded live on the market. Based on this criteria the following distinctions can be made between ETFs and Unit Trusts :
|They are passively managed or reflect a combination of active and passive management.||They are actively managed|
|Usually lower fees compared to other investment vehicles.||Respectively high costs and fees for a collective investment scheme.|
|Traded in the markets and therefore priced live.||Priced once a day based on the NAV of the fund.|
Even with this information it is not sufficient to inform us on which is the more effective investment vehicle. That is when it dawned on me to compare ETFs against Unit Trusts that track the same index and see how their differences impact their overall performance.
To make a comprehensive conclusion I am going to compare different ETFs and Units Trusts that track the same index, in order to see if a pattern can be identified. Firstly, I am going to compare the Satrix 40 ETF to the Satrix SWIX 40 Index Fund. Both of these investment vehicles track the FTSE/ JSE Top 40 which is an index that tracks the 40 largest companies listed on the JSE.
The next comparison I am going to make is between the Satrix DIVI ETF and the Satrix Dividend Plus Index Fund , as both of these assets track the FTSE/JSE Dividend Plus Index.
The final comparison that will make is between the Satrix RAFI 40 ETF and the Satrix RAFI 40 Index Fund, which both track the FTSE/JSE RAFI40.
All the products which I am comparing are financial products of the same financial company, and therefore I hope make the comparative study more accurate and effective.The metrics that I will be looking at to make the comparison are the performance of the fund as well as the fees associated with the fund.
A comparison study of ETFs v Index Funds:
1. Satrix 40 ETF versus the Satrix SWIX 40 Index fund
The performance of the Satrix 40 ETF v the Satrix SWIX 40 Index Fund (Unit Trusts)
|Time Period||The ETF||The Unit Trusts|
|1 year return||5%||-0,68%|
|3 year return||7%||3,48%|
The costs for the two funds ( we will be making a comparison between the TERs)
|The ETF||The Unit Trust|
2. Satrix DIVI ETF v the Satrix Divividend Plus Index Fund
|Time Period||ETF||Unit Trusts|
|1 year return||11,24%||10,73%|
|3 year return||13,03%||12,54%|
|5 year return||10,16%||6,31%|
3. Satrix RAFI 40 ETF v the Satrix RAFI 40 Index Fund
|Time Period||ETF||Unit Trusts|
|1 year return||6,70%||6,55%|
|3 year return||8,98%||9,09%|
|5 year return||4,94%||4,74%|
The data shows us clearly that the ETFs out perform and are cheaper than the Unit Trusts even where they track the same index. This make sense and can be backed by the characteristics that distinguish the two.
Firstly because ETFs are traded on the market a lot of the transaction costs are absorbed by the market and the issuer of the fund and not transferred to the investors, as is the case for Unit Trusts. Unit trusts are not traded live on the markets and therefore transaction costs are transferred and incurred by the investor. It is for this reason that ETFs will almost always be more cost effective when compared to a similar product in the form of a unit trust.
As to the question of why does the performance of an unit trust lag behind that of an ETF ? This is correlated with the running costs of the trusts compared to ETFs as well as due to structural factors that cause unit trusts to have a greater tracking error than that of ETFs.
So after looking at this comparison you may be asking yourself why would anyone favour an unit trust over an ETF investment? The truth is that unit trusts can be ideal assets when it comes to catering to certain financial needs. For example living annuity trusts are good options because they offer a beneficiary tax exemption to investors and provide as a great investment vehicle for retirement. Also there are certain unit trusts that provided investors exposure to a certain investment portfolios that ETFs in the market do not. Furthermore unit trusts are actively managed and therefore provide investors with hands on management of their portfolio.
Both ETFs and unit trusts offer investors with great advantages that can help them accomplish their investment goals, and therefore for this reason I believe that both should be included in your investment portfolio.