Monday, February 18, 2008

ETF and Unit Trust

Mr. Tan,
What is the difference between a unit trust, mutual fund and a ETF?

REPLY
A unit trust is the same as a mutual fund. They are the names used in UK and USA respectively for a fund that is traded daily based on its net asset value. If you wish to buy or sell units, the price will be determined at the end of the day.

An ETF is a fund that is traded on the stock exchange. You buy or sell shares in the fund, like any other share. It is based on the price struck between the buyers and sellers on the exchange. This price should reflect the net asset value of the fund, but it also depends on the liquidity.

Some investors have complained about the low liquidity of the STI ETF. This is a disadvantage of ETF, for long term investors. I believe that this disadvantage is being addressed within the next few months.

Some investors think that it is an advantage to be able to trade the ETF based on its prevailing price at any time. In my view, a fund should be invested for the longer term, and the daily NAV value is a better feature.

For intra-day trading, it is better to choose an individual, highly liquid stock.

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