Random thoughts on ETFs versus Unit Trusts

ETFs or Exchange Traded Funds are sometimes also known as non-managed or passive funds. Ie, the ETF is created against a specified index, be it a sectoral or market index, and the fund manager just purchases the components of the index as closely as possible to the ratios within the index. Such funds have an almost pure correlation to the tracking index. Being unmanaged, they are also cheaper in terms of management fees. They are also traded on the stock exchange where transaction fees are typically lower.

Mutual funds or unit trusts on the other hand, are often actively managed. Ie a fund manager or fund mgt team invests in a particular segment (be it country, region, industry, etc) and monitors and trades in order to achieve a given return. This sort of fund typically attracts a management fee and transaction costs, and are therefore relatively more expensive. They are also not traded on the stock exchange, so transaction costs (buying and selling the fund) can be higher.

So, is an active or passive fund better? The market is still out on this. Empirical statistics however show that less than 50% of actively managed funds beat their reference or tracking indexes over the long term.

One risk with regard to mutual funds are that in markets such as today, any redemption of the fund tends to lead to potential capital losses on the part of the other unit holders - as the fund management company unwinds its position, the prices will downward trend and be reflected in the U/T price. ETFs do not suffer from this as they track the index.

ETFs, being tracked against and index, also tend to be tradeable in "real time", whereas Mutual funds are typically priced out at the end of each trading day.