ETFs vs Funds. 3 ways they’re driven differently.
An easy way to think of investments is like they’re different vehicles. Two common choices an investor have are Exchange Traded Funds (ETFs) and Funds (also known as Unit Trusts). At first glance, they may seem similar as they both sell a mixed basket of stocks or bonds, but they’re actually different.
Make the most of your investment journey by understanding the differences between these two investment vehicles.
How are ETFs and Funds driven differently
#1: The route taken
ETFs and Funds may both get you to your financial destination, although not necessarily by the same route.
Since ETFs invest in a variety of stocks that mirror an index, they generally move in the same direction as that index. It’s like a driver flowing along with the traffic, at a similar speed. ETFs only change the weightage of their stocks to meet any changes in the index it is tracking. This is known as passive management.
An ETF gives you returns close to the benchmark it tracks. For example, if the Straits Times Index delivers a return of 6%, an ETF which tracks it would aim to deliver similar returns. However, since indexes can sometimes change their weightage, an ETF’s returns could be affected by these changes. Its returns could be higher or lower, depending on the changes.
Funds, on the other hand, aims to deliver better returns than the market average. Fund managers monitor the markets full-time and rebalances the fund by buying and selling stocks to achieve their objective. They’re like drivers who keep consulting a GPS to find a more efficient route to their destination when conditions aren’t ideal. This is known as active management.
While this may help the fund get ahead, there are always risks involved. The fund manager could make a decision that doesn’t pay off.
#2: Sales charge
Since ETFs are passively managed, you pay lower fees in the long run. Funds, however, involve active management, which is like having a full-time driver manging the vehicle. The cost covers the resources required to manage the fund – fund managers operating on a full-time basis and maintaining an in-house research team to conduct on-the-ground visits with portfolio companies.
#3: Currencies the Fund is listed in
In Singapore, ETFs are offered in a single currency – SGD. This means any shift in exchange rates will not have an impact on your returns.
Funds can be offered in multiple currencies. By investing in different currencies, you are diversifying your portfolio for additional protection. However, fluctuations in foreign currency exchange rates could expose you to bigger losses or gains. For instance, if some of your returns are in USD and the USD value falls, you would receive lower returns.
There’s no right or wrong choice. The type of Fund or ETF you choose depends on your financial needs and goals, as well as risk profile. For instance, if your child intends to study in the USA, you may choose to invest in the foreign currency-denominated share class of the Fund.
To help you find what works for you, you could leverage DBS iWealth® to search for a Fund or ETF that’s relevant to your risk profile.