Let’s say you’ve embarked on the wonderful journey to become a successful Wealth Chef, you’ve decided to make your financial freedom a priority, and you are showing yourself and the world that you value you by paying yourself first and putting that money into assets that will work hard for you.You have fallen in love with the concept of Passive Investing and understand why Index Tracker investments are so much healthier for your wealth than TV dinner type prepackaged investments and actively managed funds.
So it’s all good… or so you though. Just as you were feeling confident to launch forth and select your investments along comes more jargon and more decisions to make.
Do you choose an Index Tracker Unit Trust (also called mutual funds) or Exchange Traded Funds for your passive investment? What is the difference between them anyhow?
I’m so glad you asked, because I’ve got all the information you need right here to help you make your choice.
In this video I explain the difference between the two and when and why you would choose to invest with an ETF or a Unit Trust version of your selected index tracker and the table below provides a convenient comparison of the differences.
Index mutual funds and ETFs are virtually the same thing, the only difference is in how they’re bought and sold.
The content of the unit trust (mutual) funds and their corresponding ETFs are theoretically the same: a unit trust fund tracking the S&P500 should have the same stock components as an ETF tracking the S&P500, except that the ETF is bought from the stock market and the Unit trust fund from the fund house – both via your online broker.
|Unit Trust (Mutual Fund) Index Tracker||Exchange Traded Fund (ETF) Index Tracker|
|Ticker symbol (the unique code name for every share and fund)||5 letters ending in an x||2 to 4 letter|
|Where do you buy and sell them?||From the fund house (via your on-line broker or fund supermarket)||From the Stock Exchange like an ordinary company share (via your on-line broker)|
|How is the buy and sell price set?||Priced once a day, after the market closes. At that point, any orders placed during the day will be executed.||Trade just like stocks on exchanges (thus, the “exchange-traded” in their name). Their prices change throughout the trading day, and orders are executed very quickly while the market is open.|
|Trading costs – the cost of buying and selling your units in the fund||Many index funds can be bought on a “no-load” (i.e., no upfront buying cost and no commission) basis, especially if bought directly from the fund company or via an on-line broker. Always ensure there is no-load.||Brokerages generally charge a trade fee to buy or sell shares on the Exchange and hence ETF’s have this same buy and sell cost. Some on-line brokers offer free trades on selected ETFs.|
|Minimum Investment amount||Most Unit Trust (mutual funds) require a minimum lump sum investment, generally ranging from $1,000 to $3,000. The great benefit is many offer an ongoing “automatic investment” program which allows you to invest in smaller regular amount from £25, US$50 or R300.||No minimum investment as long as you can afford the price of a share and trading commission. You must take the trade cost into account and aim to keep the trade cost well below 1% which means that is the trade cost is say $10 you should invest in chunks bigger than $1000 to keep your costs low.|
Let me know your thoughts on this in the comments below and let me know what other questions you have about passive investing.