Penny Pinchers
May 30, 2010 12:00 AM | By Robert Laing - Money Editor
Consumers already confused about the difference between unit trusts and exchange traded funds (ETFs) can be forgiven for being utterly befuddled by the spat between websites selling the respective types of collective investment schemes.
The press release duel started when Mike Brown, the founder of Satrix who now sells all 25 ETFs currently listed on the JSE via etfsa.co.za, pointed out that only five of 47 general equity unit trusts beat the passive blue chip tracking ETF Satrix 40 over five years ended last December.
Nick Brummer of investonline.co.za hit back with "The truth about the difference between unit trusts and ETFs".
According to Brummer, if you had invested in a "premium branded" unit trust - the ones his company sells, acting as an online front-end to Allan Gray's linked investment service provider (Lisp) platform - you would have averaged 20.5% growth per annum against only 14% for Satrix 40 from November 2000 to April this year.
Brown retaliated with "The real truth about the difference between unit trusts and ETFs": "Of course, different time periods can be used to make a favourable case for either unit trusts or ETFs. Mr Brummer uses a somewhat arbitrary 9.5 years to indicate that Satrix 40 underperformed the return of general equity unit trusts over that period.
"A general standard for measuring fund management costs, the Total Expense Ratio, was only introduced in 2005/2006. Performance comparisons before this date suffer from inconsistent allocation of costs and most investment professionals take any local performance data that extends further back than five years with a strong dose of salts.
"The performance data for Satrix 40 does not appear to allow for the reinvestment of dividends at the end of each quarter and the capitalisation of such dividends over the remaining period. Using the correct methodology, a benchmark ETF such as Satrix 40 would have produced an annual return of 16.2% over the past 10 years, much in line with the average performance of general equity unit trusts."
This slanging match brings some excitement to an otherwise dry subject, but my concern is they are handing ammunition to insurance salesmen who see unit trusts and ETFs as a threat to the fat sales commissions they make on competing savings products such as endowment policies.
Unit trusts and ETFs do not lock people into minimum five-year terms with huge surrender penalties. Their progress can be checked regularly, avoiding discovering after years of diligent saving that all gains have been swallowed by sales commissions and management fees, besides inflation.
Both etfsa.co.za and investonline.co.za (which markets itself as the first local online unit trust seller, but was actually predated by equinox.co.za) offer savings plans which allow you to "rand average" on a low budget. Phasing your money into the stock market at regular monthly intervals puts you ahead of the pack who put it all in at the peak of a bull market shortly before the inevitable crash.
Investonline did not start out against ETFs. At the website's launch, its founders said they hoped Allan Gray would add some ETFs to its Lisp platform, specifically DBX-EU, which tracks the Euro Stoxx 50. The rand's current strength, along with possibly over-depressed European share prices, makes this a tempting buy at the moment - though not if your stomach is too weak for volatility like Tuesday's 20% dive from R30 to R24 per ETF.
The point is to diversify. Building a portfolio out of a mix of unit trusts and ETFs is a more sensible approach than joining either camp.
Ironically, active funds tend to be pitched at passive investors and vice versa. Someone with no interest in markets can buy a unit trust that blends stocks and bonds, both foreign and domestic, along with other investments such as property and gold. ETF investors, on the other hand, need to design their own portfolio out of the available choices.
The more people realise they need to become financially literate and take responsibility for their retirement and other savings, the more they tend to like ETFs.
From timeslive.co.za published on May 30, 2010
