Hi. Platinum Wealth asked me to comment on unit trusts vs ETFs. The first thing is that unit trusts can be managed actively eg. Allan Gray, or passively, eg. Sygnia Top40 Index Fund or Sygnia Skeleton Balanced 70 Fund. All ETFs are passively managed, tracking particular market indices. I will limit my comparison to passive unit trusts vs ETFs.
In South Africa unit trusts are significantly more cost effective than ETFs - so a Top40 Index tracking unit trust is significantly cheaper than a Top40 Index tracking ETF. The reason is that to access a unit trusts you only have to pay the management fees and trading costs (all disclosed on fund fact sheets). That is it. If you do not use a financial advisor, that is all you pay. In fact, with Sygnia's index tracking unit trusts, if you want to invest via a retirement annuity or a tax free savings account, those charge nil administration fees.
In terms of ETFs you have to pay multiple layers of fees before you can actually access an ETF. The reason is that ETFs are both unit trusts and "shares" listed on the JSE. Some of these fees are:
- Stockbroking fees every time you buy or sell an ETF (you have to use a stockbroker)
- JSE trading costs relating to ETFs themselves
- Management fees within the ETFs
- Bid/offer spreads between buy prices and sell prices (This is the most disingenuous aspect of ETFs - the price of an ETF at a point in time is subject to supply and demand by investors, like any other share. So you might be paying more for the ETF than the value of the underlying "index" shares it holds, and when you sell you might be selling for less than the "index" shares are worth. In South Africa, where liquidity is poor, the market maker normally steps in. A market maker makes his money from the bid/offer spreads. So realistically 1% to 3% spreads are common).
- If you want to invest via debit order, you are normally sold an "investment plan" by a platform like etfSA or iTransact. That is another 0.70% pa fee plus R3.50 per month debit order fee.
- If you want a savings product, like a retirement annuity, that costs another 0.50% pa plus.
So once you have added all the costs of accessing ETFs you are paying more than you would for an actively managed unit trust. That is what the ETF providers are skirting around all the time. Since Sygnia always does things differently, we plan to launch ETFs later this year where we charge nil stockbroking and we guarantee a minimum bid/offer spread. Let's see if we can shake things up a bit. But frankly, even with best intentions, I don't think our ETFs will be as cheap as our unit trusts tracking the same market indices.
The final comment is that ETFs are asset class specific e.g. equities, bonds. Sygnia Skeleton Funds on the other hand mix asset classes together in sensible proportions for different risk profiles. So by holding one index tracking investment you get exposure to both domestic and International equities and bonds.
Hope this helps. If you have any questions, I will answer them.