Unit trusts (or mutual funds, as they are known as in the US) are often discredited for their supposedly high costs and more active investing approach. In contrast, Exchange-Traded Funds (ETFs) are generalised as being lower cost, and generating higher returns due to a more passive investing approach. Do these generalisations of unit trusts and ETFs paint a complete picture? Are there inherent advantages of unit trusts that make them more suitable for Singapore-based investors? Let us start off by understanding what unit trusts and ETFs are, and the key differences and similarities between these products. What are unit trusts and ETFs?
Both unit trusts and ETFs are pooled investment products, or collective investment schemes. A group of securities, such as the 500 largest publicly traded companies in the US (S&P500), will be pooled together into a fund. Investors of such funds have the benefits of diversification, convenience, and security,...