ETF versus Unit trusts

ETF versus Unit trusts

You have a couple of hundred rand per month that you would like to invest and you have decided that you want to go the passive or index option. You like the idea of DIY and on top of that you are cost sensitive…you have also heard that unit trusts are expensive and if you can believe the advertising claims of ETFSA and Satrix* about being the cheapest way to invest, then you would be foolish to opt for anything but an ETF. But are ETP’s (ETF’s and ETN’s) really cheaper than unit trusts and even if they are, are they as safe as unit trusts (from an investor protection point of view)?

By way of comparison let’s look at 2 funds that track the same index: the Satrix Dividend Index ETF and the SIM Dividend Plus Index Fund unit trust. For the record, they are both passive funds that track an index that comprises the top 30 dividend paying shares (on a forecast basis) on the JSE. So they effectively comprise the same shares with the only difference being that one is an ETF structure while the other is a unit trust fund.

For starters, the unit trust version has a lower monthly investment amount of R200pm than the ETF which has a R300 minimum debit order amount. The ETF has a lower minimum lump sum investment of R1000 compared to the R5000 UT minimum.

As far as fees go, there is no initial fee to access the unit trust version. Depending on how you buy the ETF version, however, you could pay initial fees – either in the form of brokerage if you opt to go via a stockbroker or in the form of initial fees via the Investment plan. For the sake of this exercise let’s assume you opt for the Satrix investment plan (you only have R300 pm to invest and it is cheaper than going via a stockbroker).

In the case of the Investment plan, you will pay a fee of R3.50 on the debit order as well as a brokerage fee of 0.1% (excl VAT) each time you buy or sell the ETF (on R300 that is R3.80 each time you buy or sell). On top of this you will also pay an annual administration fee of 0.75% on amounts below R100000 (0.65% for amounts between R100000 and R500000 and this decreases as your value grows) and then there is the fund fee of 0.456% (excl VAT). By contrast, the only fee on the unit trust is the annual management fee of 0.45% (excl VAT)!

The final comparison comes down to investor protection. In this case, both the Satrix and SIM funds are registered collective investment schemes and this offers a great deal of protection to the investor in the case of something happening to either Satrix or SIM. In South Africa, all unit trust funds are registered under the collective investment schemes act, but this is not the case for all ETP’s. For example, many of the exchange traded notes are not registered as collective investment schemes and they carry additional risks that investors need to be aware of and that could leave them exposed if something went wrong.

In summary then, the cheapest way to “own the market” is not in fact via the Satrix or ETFSA platforms, it is currently, surprisingly to many, to buy the SIM Smartcore range of funds**. In this instance, when comparing like for like, the unit trust version is quite a bit cheaper than the equivalent ETF fund.

Notes:

*Satrix/ETFSA’s claim that their annual fees are about 1/3 of the average actively managed unit trust fund is meaningless. You will always pay more for an actively managed fund than you will for a passive/index fund. In order to make an honest comparison, they should compare their fees to that of the passive/index unit trust funds, which is what this article does and shows that they are not in fact cheaper than unit trust equivalents.

**the writer holds no interest in SIM Smartcore, other than to make use of their range of funds. Interestingly, Satrix is now wholly owned by SIM Smartcore.