Unit Trust vs ETF: Which Investment is Better?

In South Africa, investors seeking exposure to diversified portfolios often face the choice between Unit Trusts and Exchange Traded Funds (ETFs). Both investment vehicles offer access to multiple assets but differ significantly in structure, cost, liquidity, and management style. This article explores the key differences, advantages, and disadvantages of Unit Trusts versus ETFs, providing South African consumers with practical guidance to decide which investment suits their financial goals best in 2025.

Understanding Unit Trusts and ETFs in the South African Context

Unit Trusts and ETFs are collective investment schemes regulated under the Collective Investment Schemes Control Act (CISCA) and overseen by the Financial Sector Conduct Authority (FSCA) in South Africa. They pool investors’ money to buy a diversified portfolio of assets, including equities, bonds, and money market instruments. However, their trading mechanisms, fee structures, and investment approaches differ substantially.

What is a Unit Trust?

A Unit Trust is a type of mutual fund where investors buy units in the fund, which is managed actively or passively by a fund manager. The fund manager makes investment decisions on behalf of the investors, aiming either to outperform a benchmark or to track an index. Unit Trusts are priced once daily based on their Net Asset Value (NAV) calculated after market close, and transactions are executed at this price.

What is an ETF?

An Exchange Traded Fund (ETF) is a listed security traded on the Johannesburg Stock Exchange (JSE). ETFs typically track an index or commodity and are designed to replicate the performance of that benchmark as closely as possible. Unlike Unit Trusts, ETFs trade throughout the day at market prices, which can fluctuate based on supply and demand as well as the underlying asset values.

Key Differences Between Unit Trusts and ETFs

Feature	Unit Trust	ETF
Trading	Traded once a day through the Unit Trust Management Company (Manco) at NAV	Traded on the JSE throughout the trading day at market price
Pricing	Forward pricing based on daily NAV	Real-time pricing influenced by market demand and underlying assets
Minimum Investment	Often low or no minimum, allowing small investments	Requires purchase of at least one share, usually higher minimum
Management Style	Mostly actively managed, some index tracking	Primarily passive, index tracking
Fees	Higher Total Expense Ratios (TER), around 1.5% to 4% for active funds	Lower TER, typically 0.2% to 0.5%
Liquidity	Settlement within 1-2 business days, less liquid	Settlement over 3 days, but tradable anytime during market hours
Tax Efficiency	Dividends and capital gains taxed within the fund before distribution	More tax efficient due to lower turnover and in-kind redemptions

Performance and Cost Considerations

In South Africa, ETFs usually aim to deliver market-related returns by passively tracking an index, such as the FTSE/JSE Top 40 or MSCI World Index. Unit Trusts, especially actively managed ones, attempt to outperform benchmarks but face the risk of underperformance due to management decisions and higher fees.

According to a 2025 study on South African Unit Trusts, the average Total Expense Ratio (TER) for actively managed funds is approximately 1.61%, but the active management component can push the effective cost to over 4% annually. In contrast, ETFs typically charge between 0.2% and 0.5%, reflecting their passive management and lower operational costs.

This cost difference significantly impacts long-term returns. For example, a R100,000 investment in an ETF charging 0.3% annually versus a Unit Trust charging 3.5% could result in tens of thousands of rands difference over 10 years, assuming similar gross returns.

Example: Satrix Top 40 ETF vs Satrix Top 40 Unit Trust

The Satrix Top 40 ETF and the equivalent Unit Trust both track the FTSE/JSE Top 40 index. While their underlying portfolios are identical, the ETF charges a TER of about 0.35%, whereas the Unit Trust charges approximately 1.5%. For an investor holding R50,000 over 5 years, the cumulative fees paid to the Unit Trust could be nearly R4,000 more than the ETF, directly reducing net returns.

Liquidity and Accessibility

One of the main practical differences for South African investors lies in liquidity and transaction ease.

• Unit Trusts are bought and sold through the management company or financial advisor. The price is set once daily, and the investor typically receives proceeds within 1-2 business days after selling. Unit Trusts allow investments of any amount, making them accessible for investors with smaller capital.
• ETFs are traded on the JSE like shares, requiring a stockbroker account. They can be bought or sold at any time during market hours, providing intraday liquidity. However, ETFs require purchasing at least one share, which might be more expensive upfront compared to Unit Trust minimums.

For example, as of October 2025, the Satrix MSCI World ETF trades around R250 per share, so an investor needs at least that amount to start. Conversely, some Unit Trusts allow monthly contributions as low as R500, facilitating regular investing and affordability for new investors.

Tax Implications for South African Investors

Both Unit Trusts and ETFs are subject to the same South African tax laws under the Income Tax Act, including capital gains tax (CGT) on disposals and dividend withholding tax. However, the structure and trading frequency can affect tax efficiency.

ETFs generally have lower portfolio turnover, which may reduce capital gains distributions within the fund, thus potentially lowering the investor’s tax burden. Unit Trusts, especially actively managed ones, may distribute more capital gains due to frequent trading by the fund manager.

Dividends received from both are subject to a 20% dividends tax in South Africa, but investors can choose whether dividends are paid out or reinvested depending on the product.

Choosing the Right Investment: Practical Advice for South African Consumers

Deciding between Unit Trusts and ETFs depends on several factors, including investment amount, time horizon, cost sensitivity, and preference for active vs passive management.

Step 1: Define Your Investment Goals and Horizon

Long-term investors seeking low-cost, market-matching returns may find ETFs more suitable. Investors looking for potential outperformance through active management might consider Unit Trusts, but must be comfortable with higher fees and the risk of underperformance.

Step 2: Assess Your Budget and Investment Frequency

If you plan to invest small amounts regularly (e.g., monthly contributions of R500), Unit Trusts offer more flexibility. ETFs require brokerage accounts and minimum share purchases, which may pose barriers for small investors.

Step 3: Understand Costs and Fees

Compare the Total Expense Ratios (TERs), trading fees, and potential brokerage commissions. ETFs usually have lower ongoing fees but may incur brokerage fees on each trade. Unit Trusts may have initial or exit fees but often no brokerage.

Step 4: Consider Liquidity Needs

If you require intraday liquidity or want the ability to trade during market hours, ETFs are preferable. Unit Trusts settle slower and trade only once per day.

Step 5: Check Available Products and Indices

Not all indices are available as both ETFs and Unit Trusts. For example, Satrix offers ETFs and Unit Trusts tracking the Top 40, MSCI World, and Global Balanced indices, but some niche indices may only be available in one format.

Real-World Scenarios

Scenario 1: Young Professional Starting with R1,000 Monthly

A young professional with R1,000 to invest monthly may prefer a Unit Trust due to lower minimums and automatic debit order facilities. The ability to invest small amounts regularly makes Unit Trusts accessible and suitable for building wealth over time.

Scenario 2: Experienced Investor with R100,000 Lump Sum

An experienced investor with a lump sum of R100,000 looking for low-cost exposure to the JSE Top 40 index might choose the Satrix Top 40 ETF. The ETF offers intraday trading, lower fees, and transparency, maximizing long-term growth potential.

Scenario 3: Risk-Averse Retiree Seeking Income Stability

A retiree prioritizing capital preservation and income might consider a Unit Trust focused on money market or balanced funds, which are actively managed to control risk and provide steady dividends, despite slightly higher fees.

Summary of Advantages and Disadvantages

Aspect	Unit Trust	ETF
Advantages	Flexible investment amounts, active management potential, simpler for beginners, faster settlement	Lower fees, intraday liquidity, transparency of holdings, tax efficiency
Disadvantages	Higher fees, less transparent, slower trading, risk of underperformance	Requires brokerage account, minimum share purchase, trading fees, price can deviate from NAV

Conclusion: Which Investment is Better for South African Consumers?

Neither Unit Trusts nor ETFs are universally better; the choice depends on individual circumstances and preferences. For cost-conscious, long-term investors comfortable with stockbroking platforms, ETFs offer transparent, low-cost market exposure. For those seeking active management, smaller regular investments, or simpler access without a brokerage account, Unit Trusts remain a compelling option.

South African investors should carefully evaluate their investment goals, budget, risk tolerance, and preferences for active versus passive management. Consulting a financial advisor and comparing specific products like the Satrix range of ETFs and Unit Trusts can help tailor an investment strategy that aligns with personal financial objectives.