Collective investments like Exchange Traded Funds (ETFs) or mutual funds (or unit trusts, as they’re commonly known in South Africa) offer DIY investors several benefits when including them in portfolios.
ETFs and mutual funds simplify the diversification process, offering cost-effective and easy access to a broad range of assets, sectors and geographies.
This baked-in diversification helps to spread risk in a portfolio, with options for more targeted diversification opportunities within specific sectors, industries or investment themes, or broader market exposure through index tracking.
They are also well-regulated investments, with both falling under the Collective Investment Schemes Control Act (CISCA), which means they are subject to the same regulations and oversight.
ETF vs mutual fund comparison
However, ETFs and mutual funds differ in important ways, which investors should understand to make the right selection.
The main differences relate to how they trade, how they are priced, and their associated fees.
ETFs trade on stock exchanges like individual stocks, while mutual funds trade at the end of the day based on their Net Asset Value (NAV).
ETFs typically have lower fees and low or no minimum investment requirements, whereas mutual funds might have early redemption fees and higher management fees.
ETFs explained
An ETF is a type of investment fund and exchange-traded product that holds a collection of assets, such as stocks, bonds, commodities, or other securities and is designed to track the performance of a specific index, sector, or asset class.
These passive investments are easy to understand, offering a simple and cost-effective way to get your share of the markets while benefiting from baked-in diversification.
As ETFs hold a bunch of investments, they leverage economies of scale to charge lower fees compared to buying individual stocks. These low fees and minimums allow investors to start investing with small amounts of discretionary capital. For instance, Clarity, by Investec has no monthly fees and requires a minimum investment of only R25 to start investing.
ETFs are also liquid investments, allowing investors to access their capital at any time, with the option to buy and sell shares throughout the trading day at market prices. This provides greater liquidity compared to mutual funds, which are only traded at the end of the trading day.
Moreover, most ETFs regularly disclose their holdings, which lets investors see the underlying assets in the fund, providing transparency.
Mutual funds explained
Mutual funds or unit trusts are comprised of a collection of assets that are either actively or passively managed. The fund is split into equal units and sold to investors, who can select the most appropriate options to achieve their financial goals.
Passive mutual funds, also known as index funds, aim to replicate the performance of a specific market index by investing in the same assets as that index, minimising the role of fund managers.
In actively managed mutual funds, fund managers make investment decisions on behalf of the fund, selecting assets such as shares, bonds, property, cash, or a combination, to potentially outperform the market.
In South Africa, unit trusts distribute profits to investors instead of reinvesting them into the fund, offering an attractive and accessible investment vehicle well-suited to a range of investment goals, whether growing or preserving capital.
Due to the regulated nature of unit trusts, coupled with transparent pricing and performance, these investments offer investors an element of trust and safety.
This transparency and professional management mean DIY investors do not need to conduct the extensive due diligence into the underlying structure, custodianship and administration often required when investing in other investments.
Another important benefit is the low barrier to entry as unit trusts have low minimums, are cost-effective, and are easily accessible via online trading platforms. These features offer investors an efficient entry point to a broad range of assets and financial markets, both locally and globally.
