What is an exchange-traded fund?

What is the difference between an exchange-traded fund and a unit trust?

Both of these investments make it far easier to invest on the Johannesburg Stock Exchange because they give an investor exposure to a wide range of shares for as little as R300 a month or even less.

A unit trust is an investment product offered by a fund manager. They pool the money of many investors into an investment portfolio. In most cases this portfolio is actively managed by a fund manager who selects the underlying investments based on their research.

Depending on the mandate or the aim of the fund, the fund manager can invest in a wide range of asset classes – meaning they can buy shares both locally and internationally, invest in bonds, cash and listed property.

An exchange-traded fund or ETF also gives the investor exposure to a basket of shares except that an ETF is itself a listed security. What that means is that you can buy an ETF through a stockbroker and by buying just one ETF, you get exposure to many underlying shares. This is because an ETF tracks an index made up of a basket of shares. For example, if you bought an ETF that tracked the JSE Top 40 Index, you would have exposure to the 40 largest shares on the JSE.

Because an ETF only tracks an index, there is no active manager selecting which share to invest in and so you get the average return of the market, less costs. Therefore the fees of an ETF are generally lower but it can only track a single index. So unlike a unit trust that could have a mandate to invest across multiple asset classes, a single ETF would only invest in a single asset class, whether that is local or international shares, or listed property.

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