Investing Guide: ETFs or Unit Trust Funds (Which is better for you?)

Seeking a broad market returns consistent with the market? Or a selective investment portfolio?

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The Basics: Why invest in Exchange Traded Funds or Unit Trust Funds?

When considering available investment options, both ETFs and Unit Trust Funds are popular options capable of generating a potentially higher financial returns than your bank accounts or life insurance plans. However, it can be challenging for non-financial trained individuals to fully understand the differences, much less deciding which ETFs or Unit Trust Funds to put their hard-earn money into.

Read about: Investing Basics – Concepts and investment options

Read about: An introduction to Unit Trust Funds

The similarities: ETFs and Unit Trust Funds

Both ETF or Unit Trust Funds are collective investment schemes (CIS) regulated by MAS. Your money is pooled or combined with money from other investors and invested according to the fund’s investment objective. This allows wider access to funds/ investment in financial instruments such as equities, bonds, commodities or other assets classes that you otherwise might not have access to on your own.

Investment into either can be made with cash or your CPF and SRS monies. For CPF and SRS, the ETFs or Unit Trust Funds must also be a CPF approved Fund. This means they have to meet specific criteria determined by CPF board. Generally, CPF approved Funds must have shown certain successful long-term track record with potential for growth on a forward basis.

The differences: ETFs and Unit Trust Funds

Unit Trusts Funds (UTs)

Actively managed by professional fund management companies such as Aberdeen, First State Investments, Blackrock, Schroders, amongst others. Fund managers, analysts and financial professionals in their areas of specialities use their knowledge and research to decide how to allocate the pooled money.

  • A Financial Advisor/ Wealth Planner role is to periodically review, adjust and balance your investment portfolio.
  • Have a specific objective and investment mandate, the main objective is to beat the market returns.
  • Net Asset Value (NAV) dependent on the underlying assets the fund invests into.
  • May invest in a diversified range of asset, including holding cash for investment opportunities.
  • The fund manager/s can decide the allocation of the money invested with them.
  • Performances largely dependent on Fund managers expertise.
  • Higher cost due as it requires active management and allocation of investment assets.

Read about: Say NO to high investment fees and charges

Exchanged Traded Fund (ETFs)

  • Passively managed and traded on a stock exchange.
  • An ETF tracks and replicate the underlying index as closely as possible.
  • Investment can be done personally with a stock brokerage account.
  • Tracks and allocate according to the underlying index, the main objective is to achieve returns similar to market movement.
  • Price closely follows the tracked index, dependent on supply and demand.
  • Strictly follow the number of securities and amount of holding according to the index.
  • Cannot deviate securities allocation from the index.
  • Performances dependent on market movement and seniments.
  • Lower cost as allocation follows the underlying index.

ETFs or Unit Trust Funds: Which is a more suitable investment option?

Depending on your individual investment preference, ETF or Unit Trust Funds has its advantages and disadvantages. Do you wish to take a hands-on approach and manage your investment decision yourself or let financial professionals handle part of the investment process?

The decision for choosing ETF or Unit Trusts depends on how you look investments should be managed:

Exchange Traded Funds (ETFs)

For ETFs, the investor decides the timing of when to invest, take profit or cut losses accordingly. A certain amount of financial knowledge and constant market update may be required to successfully make investment decisions. As the investor has to make more decisions and manage his investment portfolio, the fees and charges involved are lower, compared to investing in a Unit Trusts.

Investors in ETFs reasons that an index, over a long time horizon, will appreciate in value and achieve growth in the long run. Hence active management is not as important, as the main objective is to achieve financial returns similar to market performance.

Unit Trust Funds (UTs)

Unit Trust Funds, on the other hand, are managed by their respective fund managers which invest based on their expertise and research. A financial advisor or wealth planner works with the investor to plan and decide which Unit Trusts to invest in, and when to make changes. As advice and updates are given and a portion of the investment decision is managed by third parties, the fees and charges involved are higher compared to investing in an ETF.

Investors of Unit Trust Funds believe in active management to manage risk, hence balancing and making changes in their investment portfolio according to market changes.

*LIMITED TIME 1% investment sales charge for your Unit Trust Funds

The main objective is to beat market returns in the long run. At the same time,  reduce downsides or losses during market downturn by efficient allocation of resources.

Why are ETFs getting more attention lately

In the United States and some other parts of the world, capital gains from investments are tax deductible. Income stream or dividend payout from Unit Trusts are subjected to tax. At the same time, Social Security payout will also be reduced as dividend streams from their investment are considered as a form of income. Returns from ETFs are usually accumulated and reflected in the ETF Net Asset Value, with investors only paying tax upon selling off their ETF funds.

Hence, ETFs is a better option to grow their funds until withdrawal is required during retirement in certain countries.

In Singapore, capital gains from Unit Trusts are not tax-deductible, meaning that an investor can use Unit Trust Funds as a form of an income-generating instrument without paying tax for the received income from Unit Trust Funds. Singapore own version of social security is known as CPF Life and the payout is dependent on how much funds is in your CPF retirement account (RA), meaning that receiving income from other investment sources does not have a material or financial impact on your CPF Life payout amount.

Look into: Unit Trust Funds Directory (Income payout Unit Trust Funds)

Focus on staying invested

While there are pros and cons for each investment options, the key takeaway is to stay invested and not let market cycles affect your financial objective. An investment portfolio should be part of your financial goals and objectives, be it for wealth preservation or capital accumulation.

Read about: Where do I start with financial planning?

Look into: Unit Trust Funds Directory (Capital Growth Unit Trust Funds)

Work with an experienced financial planner that manage, review and adjust your investment portfolio periodically when the financial market changes.

New to Investing?

Click here for more about investing in Unit Trust Funds

Stay informed before you invest

Investment requires a long-term commitment. Specific unit trust fund investment goals and objectives, investment benefits and payout (if any) will differ across unit trust funds.

Why regret only years later, when you find out that the investment products you took up are not suitable for you?

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Special thanks for clarification to our contributor: Kelvin Tan from Aviva Financial Advisor (AFA).