People naturally always want the best deal available, and bargain hunters may be tempted to go for the cheapest options available in the market for cost savings, but are the cheapest options definitely the best ones as well?
Increasingly there have been comparisons between Exchange Traded Funds (ETFs) and Unit Trusts (UTs) when you want to invest in certain markets. The main point that bargain hunters harp on is that ETFs that track the index have very low fees, while UTs can be considerably more expensive to invest in for the same markets. While it is often true that index ETFs have generally lower investment costs, one would have to fully analyse the pros and cons of the investment instrument before determining whether it is “good” or even suitable for you in the first place.
Consider this hypothetical scenario:
In this scenario, the annual costs for the UT come up to 4 times that of the ETF, and people who focus on looking for the cheapest investment option will immediately dismiss the UT and decide that investing in the ETF is the better option. But if after accounting for the costs, a comparison between the net annualised return of 6% and 12% respectively for the ETF and UT would mean that despite the higher costs, investing in the UT makes you financially better off than investing in the ETF, ceteris paribus. There is the argument that many UTs underperform the ETFs on top of having higher costs and I do not dispute this, but it is also true that there are many UTs that do actually quite consistently outperform the ETFs. Analysing each UT to determine whether or not it is a worthwhile investment takes expertise, time, and effort however, and you might want to consider approaching a professional and competent adviser to guide you and aid you in your investment choices.
On the other hand, however, ETFs gives more price certainty in a sense since prices are determined at the time that you transact, as opposed to most UTs as they usually determine the transactional prices a few working days after your order has been put through. This also means that ETFs have intra-day price fluctuations, and will likely require more of your attention when buying in or selling off your holdings.
People have also asked me whether it would be a good idea to simply buy all the stocks in the index themselves directly to save on costs as well, but this may not work depending on your transaction medium, not to mention the amount of work you have to put in to purchase all the stocks individually (STI Index has 30 stock components for example), and the effort required to monitor and make adjustments to your investment portfolio. Even for people with the expertise to invest, it is often more worthwhile to delegate at least part of the investment management responsibilities to a professional.
There are pros and cons to every single investment instrument, and this means that it is difficult to simply claim any one investment instrument to be the absolute best; each investment instrument (be it stocks, ETFs, UTs, bonds, futures etc.) has its own strengths, weaknesses, and role to play in each individual’s investment portfolio. The percentage allocation into each instrument may vary between each individual, as everyone has different priorities, preferences and financial situations, so do approach a trusted and competent adviser to advise on how you should structure your investments and which instruments may be more suitable for you.
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