mutual funds, unit trusts and ETFs

elephantrosie

Virgin investor here.

May I get guidance from investor gurus on board on what is the difference between these?

Reaper

"Mutual funds" is largely an American expression, we tend to use the terms unit trust and OEICS (open-ended investment companies). These are funds you give your money to, they pool it with all the other investors and go out and buy whatever investments they feel will do well. The advantage is an experienced manager makes the decisions for you rather than you having to choose individual shares or bonds. Also they can diversify over lots of investments to reduce the risk of a single company going bankrupt badly affecting your investment. The downside is there are ongoing charges to pay the manager whether or not you make a profit.

Unit Trusts are the old variety, OIECS are the modern (and slightly better) variation. I will explain the difference if you want.

ETFs and Trackers are similar in pooling investors money but this time there is no manager making decisions. They buy and sell according to rules. For example it may mirror the UK's FTSE All Share index, or buy the top 50 dividend payers in the USA etc. As a result the charges are lower.

There is much debate whether active managers are worth the extra cost, but I won't go into that here unless you want me to.

dunstonh

As a result the charges are lower.

Although not as much as they used to be an in some cases, the comparable UT/OEIC can be cheaper now.

UT/OEICs used to bundled pricing. i.e. their cost included everything to retail. Whereas ITs were unbundled. Just the cost of the IT. You had to add platform and dealing costs etc on top. However, OEICs/UTs went unbundled 4 years ago and the costs are now much cheaper and more in line with other unbundled priced investments.

Reaper

dunstonh wrote: »

UT/OEICs used to bundled pricing. i.e. their cost included everything to retail. Whereas ITs were unbundled. Just the cost of the IT.

You've slightly confused me there. By "IT" do you mean Investment Trusts? I was comparing ETFs with UT/OIECS. Investment Trusts are another option but a bit different.

dunstonh

Reaper wrote: »

You've slightly confused me there. By "IT" do you mean Investment Trusts? I was comparing ETFs with UT/OIECS. Investment Trusts are another option but a bit different.

No. I confused myself. Clearly time for a coffee.

Plus

Reaper wrote: »

"Mutual funds" is largely an American expression, we tend to use the terms unit trust and OEICS (open-ended investment companies). (etc)

I think you've mixed up two things. One is how the investment is structured, and another how it operates:

Open-ended funds (unit trusts and OEICs) contain as much money as investors want to put into them. If an investor buys units, it means the fund company has to take their cash and buy some more shares/bonds/whatever to keep the fund in balance - or they risk being overweight in cash. Likewise if the investor wants to sell, the fund has to sell shares to keep up. They are typically priced only once a day, and when you commit to buy you don't know the exact price in advance. Having to follow investors' whims can cause problems for funds with illiquid assets - eg property OEICs often suspend redemptions during big market falls, because you can't sell 20% of an office block or shopping centre you own.

Closed-ended funds (investment trusts and REITs) have a fixed pot of money inside them, which are used to buy assets (shares, bonds, property). They are traded on the stock exchange like a normal share. That means if you want to buy, you have to find someone willing to sell the same amount. As a result the price can diverge from the Net Asset Value (NAV), which is the value of the assets inside them. They can therefore be on a premium or discount. Sometimes the trust changes the amount of money they hold to prevent the premium/discount getting out of control.

ETFs (exchange-traded funds) are sold on stock exchanges like investment trusts (so you have instant pricing), but operate more like open-ended funds - when more people buy, they create more units. In this way they track the value of the underlying assets. ETFs can also be 'synthetic', which means they use derivatives contracts instead of holding physical assets like shares, gold or oil (because some assets are tricky to keep buying and selling - it's easier to trade in virtual oil than push tankers around).

There is then a separate discussion of active v passive, which is a spectrum. At the end of active you have human managers making every decision, at the extreme of passive you just buy everything in the market automatically. In between are things like funds which aim to follow some human-decided trading strategy but the implementation is left to a computer. Many people buy 'trackers' which are mostly but not entirely passive: eg a 'FTSE 100 tracker' is designed to track only the shares in the FTSE 100 index: they chose the FTSE 100 (a human management decision) but following the ups and downs of shares on a daily basis is undertaken by the computer.

ETFs, being largely automated, often follow a passive approach, but not always. Open and closed-ended funds can be passive or active - it depends on their aims.

Reaper

Thanks, I am aware of the differences but as the OP is a novice investor and only asking about UT v ETFs I simplified my answer. Your post is more accurate but I fear when the OP sees mention of derivatives contracts in synthetic ETFs they will be off to the bank to earn 0.1% on their savings instead!

dunstonh

Reaper wrote: »

Thanks, I am aware of the differences but as the OP is a novice investor and only asking about UT v ETFs I simplified my answer. Your post is more accurate but I fear when the OP sees mention of derivatives contracts in synthetic ETFs they will be off to the bank to earn 0.1% on their savings instead!

This is indeed the problem with such an open ended question asked by the OP. If a full answer was to be given on each option it could lead to hundreds of pages of text.

Perhaps the OP can come back and give us an idea of the investment amount. More likely it is a relatively small amount and things like ITs/ETFs etc wont be relevant and a single multi-asset OEIC will do the trick and any discussion on hypothetical alternatives would be a waste of time.

There hasnt been any mention of SICAVs, onshore life funds, offshore life funds, regulated offshore funds, unregulated funds, pension funds or any other types or variations either. A "virgin" investor probably doesnt even know some of those exist.

elephantrosie

thanks Plus and Reaper. too kind.

i intend to invest under 4k in ETF via MoneyFarm and a few hundreds in MoneyThing.

Hope I am doing it right....

badger09

elephantrosie wrote: »

thanks Plus and Reaper. too kind.

i intend to invest under 4k in ETF via MoneyFarm and a few hundreds in MoneyThing.

Hope I am doing it right....

Why MoneyFarm?

dunstonh

i intend to invest under 4k in ETF via MoneyFarm and a few hundreds in MoneyThing.

If you are going to be doing that, then why did you ask the question?

Moneyfarm, IIRC, is a robo-advice offering. Prebuilt portfolios with no selection made by you other than your risk profile.