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Unit trusts and ETFs may appear to be largely the same on the surface but they differ in pricing, liquidity levels, and management styles, each impacting portfolio performance in its own unique way. This article helps clarify which of them is better suited to you based on your financial goals, risk tolerance, time horizon, and liquidity preferences.

Investors in ever-evolving markets such as Malaysia frequently turn to instruments that offer stable returns, easy accessibility, and relatively low-risk levels. Two such instruments are unit trusts and exchange-traded funds (ETFs).

Now, while both instruments allow you to build well-rounded portfolios with exposure to different asset classes, sectors, and geographies, their differences significantly influence their role in an investor’s portfolio. Let’s look at these differences to help align your investments better with your financial goals.

Unit trusts and ETFs: How are the two similar?

Both instruments pool capital from investors into a diverse portfolio with several different assets, including equities, debt securities, commodities, and more. The underlying goal with both is diversification, which mitigates concentrated risks arising from overexposure to any one asset and balances growth with stability.

That said, they differ significantly in pricing, liquidity, and costs — factors that significantly influence their role in a portfolio.

Unit trusts vs ETFs: What sets them apart

Here are the distinctions between the two instruments to help you choose the best fit for your portfolio.

Management: Active vs passive investment styles

With unit trusts, fund managers periodically review and rebalance the fund’s holdings to capitalise on emerging opportunities and mitigate impending risks.

ETFs are passively managed instruments that track and replicate the performance of a particular market index by investing in the same equities, and in the same proportion, as that of the underlying index.

Ease of trading

Unit trusts are priced once daily based on their net asset value (NAV). Redemptions are typically made through an agent and may take a few days to process. They’re not highly liquid investments and don’t allow investors to capitalise on momentary fluctuations. This makes them more suited to those who don’t require frequent review or rebalancing of their portfolio and have sufficient surplus funds to tackle any unforeseen expenses.

ETFs can be traded on the stock exchange throughout market hours. Their prices fluctuate based on supply and demand, meaning investors can capitalise on market movements and have greater liquidity to tackle sudden emergencies – whether accidents, illnesses, or home repairs.  

Costs stack up

Because they’re actively managed, unit trusts cost more to invest in. Low initial investment requirements, however, also mean they’re easily accessible and help develop the habit of disciplined saving.

ETFs are passively managed and have lower expense ratios, which helps ensure returns aren’t affected too much when one redeems their investment.

Unit trusts vs ETFs: Finding the right fit for your portfolio

The right choice between unit trusts and ETFs depends not only on returns but also on other factors such as one’s investment horizon, risk appetite, liquidity preferences, and cost sensitivity.

Time Horizon

Unit trusts are geared more toward capital appreciation. This makes them suited for newer investors looking to take a hands-off approach to wealth creation over an extended period to fulfil long-term goals such as building a retirement corpus, funding their children’s education, and so on.

ETFs are more suited to investors looking to park their funds in the short term and active traders looking to capitalise on emerging market opportunities. This also makes them more suited to fulfilling short-term financial goals such as taking a trip abroad, purchasing a new vehicle, and more.

Risk appetite

Active management and diversification make unit trusts more suited to conservative investors with lower risk tolerance.

While ETFs also invest in several asset classes, their real-time pricing mechanism means that any volatility they face is more pronounced. They are suited to investors with a shorter investment horizon and higher risk tolerance.

Liquidity needs

Redemptions on unit trusts take several days to process, making them more suited to long-term investors who don’t require immediate access to their capital.

ETFs can be immediately bought or redeemed during market hours, making them a highly liquid instrument. They are a better fit for those looking to park their surplus funds in the short term.

Costs involved

Unit trusts have higher expense ratios, management fees, and potential sales charges. These costs can accumulate over time and reduce overall net returns, particularly if the fund underperforms.

ETFs have lower management fees. However, to analyse their cost effectiveness, one should factor in brokerage fees each time shares are bought or sold.

SC Mobile: Your gateway to a diversified portfolio with unit trust investments

SC Mobile makes it easier than ever to invest in and manage a comprehensive portfolio with access to over 250 unit trust funds across five currencies, round-the-clock visibility on their performance, and an interactive fund library with in-depth research. It also allows you to make investments as lump sum contributions or through a small, fixed sum via a Regular Savings Plan (RSP).

Minimum monthly contributions for most unit trust funds start at RM 100 for easy accessibility. All you need is an active savings account with us and a complete Customer Investment Profile.

SC SmartStocks: Investing in ETFs, Simplified

SmartStocks lets you invest in ETFs on 12 stock exchanges across seven markets, with real-time forex conversion, price alerts, custom watchlists, and more. In-depth market insights powered by StockReport+ also help you stay a step ahead, always making timely, well-informed decisions with conviction.

Both unit trusts and ETFs are proven instruments for portfolio diversification. They ensure a stable income in the short run and capital appreciation in the long run via compounding. While the underlying objectives are the same, making the right choice hinges on your individual financial goals, risk tolerance, investment horizon, and cost sensitivity.

If you’re a Standard Chartered client with a Current or Savings account, log in to SC Mobile to explore the Unit Trust and ETF-related investment funds available.