Exchange traded funds, or ETFs, are a relatively new type of collective investment. Unit trusts have been around since the mid-1960s, whereas ETFs emerged in South Africa only in 2000, with the Satrix Top 40 ETF the first fund to be marketed to local investors.

In many ways, ETFs and unit trusts are similar: both comprise a portfolio of assets in which money from a large number of individual investors is pooled and divided into manageable portions of equal value that can be bought and sold. Both locally managed unit trust funds and most locally managed ETFs are governed by the Collective Investment Schemes Control Act. 

However, if you delve a little deeper, you will find important differences between the two types of investment. These concern their legal structure, how you invest in them, what they invest in, how they are managed, and the costs.


As with unit trusts, ETF investors’ money is pooled in a trust fund that has an independent trustee that provides fiduciary oversight. The fund is managed by a management company and has a mandate to invest in certain assets. 

Unlike a unit trust, the fund is listed on the stock exchange (the JSE), and the “units” owned by investors are shares that can be traded on the exchange in the same way as company shares – hence the name exchange traded funds. Just as you would own units in a unit trust fund, you own shares in an ETF. 

ETF investors have as much protection as investors in a unit trust fund, because the same regulations apply and all such investments fall under the watchful eye of the Financial Services Board.

However, shares behave in a slightly different way to units and are subject to different costs, as explained below.


ETFs must be bought through the same channels as you would buy shares, which means going through a stockbroker. This isn’t as daunting as it may sound, because the main ETF investment platforms function as online stockbrokers. One online platform, etfSA, gives you access to all the ETFs (and other exchange traded products) on the market. 

A major difference between ETFs and unit trusts is that with a unit trust you buy units from the management company, which creates units as you buy them and destroys units as you sell them. With an ETF, your shares are traded, which means there must be a willing seller when you want to buy and a willing buyer when you want to sell. 

Market liquidity is provided by what are known as “market makers”, financial firms that assume the risk of holding a certain number of shares in order to facilitate the trading of that share. These market makers, also known as authorised participants, have the power to create new shares if the market demands it.

Another difference is how prices are determined. The net asset value (NAV) of a unit trust (the combined value of all the assets in the portfolio at a specific time) is also the price at which units are bought and sold. With an ETF, although the NAV indicates the value of your investment, the buy and sell prices at which the ETF is traded on the exchange may differ slightly – with the NAV and with each other. The difference between the buying and the selling prices is known as the spread. For popular ETFs that are traded frequently, the spreads are relatively insignificant.

Prices are updated frequently and are available to investors throughout the trading day, not just once a day as is the case with unit trust funds. 


ETFs are index-tracking funds, unlike unit trusts, which may or may not be index-trackers. In fact, the vast majority of unit trusts are not trackers; they are actively managed (see “Active and passive funds”, below).

Index-tracking funds, the Satrix website says, do exactly what their name suggests – they track or replicate a particular index. 

“A tracker fund that uses full physical replication simply holds the same shares that are contained in the index in the same weighting as they appear in the index. The tracker fund will mirror the index with the aim of achieving a return as close as possible to that of the index.” For example, Satrix says, a fund that tracks the FTSE/JSE Top 40 Index would hold the shares of the same 40 companies, in the same proportion (weighting), as the index. "The portfolio manager of the fund will buy and sell shares when the Top 40 Index adds or removes shares from the index. This is known as rebalancing. If the index drops, so will the price of the fund [and vice versa].”

There are many indices reflecting different aspects of the financial markets, and ETFs track many of these. Indices tracked by ETFs include the FTSE/JSE All Share Index (Alsi), the Top 40 Index, the S&P500 (the 500 top shares in the United States), sector indices such as those that reflect the financial (Fini), resources (Resi) or listed property (Sapy) sectors, and specialist indices such as the one that tracks JSE shares with the best dividends (Divi). There are also ETFs that track currency exchange rates and precious metal prices.

Unlike another type of instrument, exchange traded notes, ETFs hold the underlying assets in the portfolio. Gold ETFs, for example, hold physical gold bullion.

Like unit trusts, ETFs pay share dividends to investors, normally at the end of each quarter.


There are transaction costs and annual management costs when you invest in ETFs. 

Buying and selling costs, which are essentially brokerage costs, differ from broker to broker, and they may be a flat fee or a percentage of your investment. etfSA charges 0.08% (excluding VAT) on what you buy or sell, and there are nominal JSE/Strate fees and investor protection fees.

There are also annual administration and management costs, which may be expressed as a total expense ratio (TER). 

etfSA charges the following annual costs (excluding VAT) on your investment in its Investor Plan, on a sliding scale:

• R0 to R500 000: 0.65%;

• R500 000 to R1 million: 0.5%; and

• Over R1m: 0.35%.

The overall investment costs for ETFs are lower than those for actively managed unit trust funds, and they are roughly in line with unit trust funds that track an index (as ETFs do), but not always, so it’s advisable to check.


A tracker fund (ETF or tracker unit trust) is also referred to as a passive fund, because the fund simply tracks the performance of a market index, and in so doing delivers returns in line with the index (minus investment costs). 

With actively managed unit trust funds, fund managers carefully select the underlying assets, such as shares, a process that involves expensive teams of analysts analysing markets and individual companies. 

The argument for passive funds is that many active fund managers, despite the additional expertise at their disposal, don’t, over the long term, perform better than the index they use as a benchmark.

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