This post is part of a series of posts that discuss about the STI ETF in detail. To access the other posts in this series, click here
So what are the differences between the STI ETF and unit trust ? What are the advantages and disadvantages of investing in STI ETF over unit trust ? Both have their advantages and disadvantages but there is one crucial area which makes the STI ETF a more attractive form of investment as compared to unit trust.
1.Sales charge
Sales charge or sales load is the amount of fees that you have to pay for the purchase of the investment. In general, the sales charge for unit trusts that deal in equities is around 2.5%. The equivalent of sales charge for the STI ETF is the brokerage fees. This is because the STI ETF is traded over the stock exchange, thus we will have to pay the brokerage firm to help us purchase the STI ETF over the stock exchange in order to purchase the STI ETF. In addition to the brokerage fees, there are also other fees associated with the brokerage fees and they are listed below.
Brokerage fee: Around 0.25% to 0.275% or a minimum of around $25 depending on which brokerage firm and the value of the contract
Clearing fee: 0.04% on contract value
SGX Trading fee: 0.0075% on contract value
GST: 7.0% on each above item
Contract value refers to the amount of stocks that you have bought. For example, if you bought 5 lots of STI ETF at $2.00, the contract value will be 5 lots * 1000 * $2.00 = $10,000. Do take note that 1 lot is the equivalent of 1000 shares thus we will need to multiply the 5 lots by 1000 in order to get the total number of shares
The total fees for purchasing the STI ETF will be around 0.3%. Do take note that if you wish to sell the STI ETF, you will need to pay the brokerage fees again.
Regardless of any investment amounts, the sales charge for purchasing the unit trust is always fixed at around 2.5% depending on which unit trust while the brokerage fees for purchasing the STI ETF is around 0.25% to 0.275% or a minimum of around $25 depending on the brokerage and the contract value. Thus if the contract value is too small, it may be more expensive to purchase the STI ETF due to the minimum brokerage fee of around $25. Otherwise, the fees required to purchase the STI ETF is lower than than of unit trusts.
2.Annual Expense
In general, unit trusts have an annual expense ranging from 1% to 1.5% while the STI ETF have an annual expense of 0.3% currently thus the annual expense of the STI ETF is much lower than that of unit trusts. This is because the fund manager of unit trusts have to play an active role in managing the unit trust such as the purchase and sale of stocks in the portfolio. Other expenses include the fees being paid to the management and the trustee. In contrast, the fund manager of the STI ETF only needs to play a passive role in managing the STI ETF by maintaining the stocks that constitute the index and making sure that the STI ETF tracks the index.
3.Returns in the long run
The crucial difference between the STI ETF and unit trusts lies here. STI ETF has a higher probability of generating better returns as compared to other forms of investment in the long run. We can take a look at a study that compares the returns offered by ETFs and unit trusts in general.
Vanguard 500 Index Fund is a fund which tracks the S&P 500 index for the US market. Index funds are basically the same as ETF as both tracks the index except that it is not traded on the stock exchange. A study was done to show the returns of the Vanguard 500 Index Fund as compared to unit trust or mutual funds.
Looking back from Dec 31, 2002, how many US stocks funds outperformed Vanguard 500 Index Fund?
One year:
1186 of 2423 funds (or 48.9%)
Three years:
1157 of 1944 funds (or 59.5%)
Five years:
768 of 1494 funds (or 51.4%)
Ten years:
227 of 728 funds (or 31.2%)
Fifteen years:
125 of 445 funds(or 28.1%)
Twenty years:
37 of 248 funds(or 14.9%)
Taken from Lipper Inc.
As you can see from the results, the longer the time frame used to compare the returns between ETF and unit trust, the lesser the probability of a unit trust beating a ETF. In short, it is highly probable that the STI ETF is able to outperform unit trusts in the long run.
In conclusion, STI ETF will be a better form of investment over unit trusts in the long run simply due to the higher chances of achieving a better return. I will be touching on how should one go about buying the STI ETF in my subsequent posts.
Monday, December 8
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Thanks for the informative article. I agree that in long run, ETF would outperform index fund as well due to its lower ER. Just wondering whether you yourself encounter liquidity problem for ETF purchase? Since i don't have much money to invest, i also think about whether investing in a single blue-chip company (eg. SingTel) share or STI ETF. What is your view on this? Thanks.
ReplyDeleteHi Zzz,
ReplyDeleteSo far I have not encountered any liquidity problem when I'm purchasing the STI ETF as the amount that I'm purchasing is not that substantial. I suggest that you should invest in the STI ETF rather than a single blue chip company if you don't have the time to analyze the financials and the business of the company. Since the STI ETF is holding a portfolio of stocks, there is some diversification to some extent.
Hi, Kay,
ReplyDeleteThanks a lot for your advice :)
Thanks for sharing such great post, as i am having less information about this, so your post will help me a lot.
ReplyDeleteHi Zzz and Alex,
ReplyDeleteI'm glad to be of some help.
Kay
There is no advantage of UT over ETF? then why the existence of UT?
ReplyDeleteAll Investments carry risk, just do within your means
ReplyDelete