Unit trusts vs Shares vs ETF: Which one is right for you? 

Investing can be scary at first, but continuing to learn reduces your fear over time. Today is one of those days. Investing your money is a great way to build wealth and secure your financial future. However, with so many investment options available, it can be challenging to decide which is the best for you. In this article, we will explore the differences between unit trusts, shares, and ETFs, and help you determine which is the best investment option for you.

Unit trusts

Unit trusts are investment vehicles that pool money from different investors to invest in a variety of assets such as shares, bonds, and property. Investors purchase units in the trust and the value of the units is determined by the value of the underlying assets.

One of the key benefits of unit trusts is diversification. By investing in a variety of assets, investors can spread their risk and reduce the impact of any single investment performing poorly. Unit trusts are managed by professional fund managers, who have the expertise and resources to make informed investment decisions on behalf of investors. Pooled investors enable retail investors to access asset classes that were previously unavailable to them.

In South Africa, there are over 1500 unit trust options available, each with its individual investment strategy and risk profile. Some of the most well-known names include Allan Gray, Coronation, and Ninety One (Previously Investec). These fund managers have a long track record of delivering strong returns to investors and are well-regarded in the investment community. If you need help choosing a unit trust fund, here are some guidelines.

Our opinion: Unit trusts are good investments if you are new to investing, or don't feel comfortable picking stocks. Paying a fee to a professional investment team to look after your investment is a safer bet than trying to do it on your own. Ensure you read this article to understand ASISA categories to correctly align your investment risk with your goals.

Shares

Shares, also known as equities, represent ownership in a company. When you buy shares in a company, you become a shareholder of that company. You generate income via dividends (depends if dividends are declared and which shares you hold) and capital growth if the share price increases.

Shares are traded on the stock exchange, and their value is determined by supply and demand. Shares offer investors the potential for high returns but also come with higher risks. The value of shares can fluctuate significantly based on market conditions, company performance, and other factors. However, shares can be a good long-term investment option, as they tend to outperform other asset classes over the long run.

Investing in shares requires a good understanding of the stock market and the companies you are investing in. Many South African companies are listed on the Johannesburg Stock Exchange (JSE), including large companies like Naspers, Sasol, and Standard Bank. Investors can purchase shares directly through a stockbroker, EasyEquities, or indirectly through a unit trust or ETF that invests in shares.

Our opinion: Choosing shares of companies takes a lot of knowledge. From understanding its competitive advantages, the balance sheets and cash flow positions. It can be a bit too much for the new investor to understand initially. If you are a new investor, rather invest in unit trusts or ETFs while you build knowledge and confidence. For seasoned investors shares are a fantastic long-term investment.

ETFs

Exchange-traded funds (ETFs) are investment vehicles that track the performance of an underlying index or asset. ETFs trade on the stock exchange like shares and provide investors with exposure to a range of assets, including shares, bonds, and commodities.

ETFs offer investors the benefits of diversification, low costs, and ease of trading. Unlike unit trusts, which are priced once a day, ETFs can be bought and sold throughout the trading day at market prices. This makes ETFs a good option for investors who want to trade frequently or make short-term investments.

In South Africa, there are several ETF options available, including EasyETF, Satrix, Prescient, and Sygnia ETFs. These funds track a variety of indices both local and offshore.

Our opinion: ETFs can be seen as a hybrid version between unit trusts and shares. It's safer than choosing a single stock and ETFs would track a diversified index of stocks such as the ALSI or Top40. In this example, the ETF would also be less diversified than unit trusts, if the investor is looking for long-term growth. For new investors, start with unit trusts and ETFs, build confidence and if you want to invest in stocks, make sure it's not a big portion of your portfolio when you start. Aim for a blend of up to 70% in ETFs and “explore” with the other 30%. Here is an article on the core and explore investing method. 

Best Investment Options for you

So, which investment option is the best for you? The answer depends on your investment goals, risk tolerance, and investment horizon.

If you are a conservative investor looking for steady, long-term growth, unit trusts may be the best option for you. Unit trusts offer diversification and are managed by professional fund managers who have the expertise to make informed investment decisions.

If you are a more aggressive investor looking for higher returns, shares, ETFs, and some unit trusts may be the best option for you. Shares offer the potential for high returns but also come with higher risks, mainly from concentration risk in a single or few companies. It is important to have a good understanding of the stock market and the companies you are investing in before investing in shares. If you want a diversified portfolio of stocks, then ETFs would be your best option. 

Key differences between unit trusts, shares, and ETFs:

Summary

It is important to note that the risks and benefits of each investment option will depend on the specific fund, share, or ETF you invest in, as well as market conditions and other factors. Therefore, it is crucial to do your research, understand what you are investing in, and even consult with a financial advisor before making any investment decisions.

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