What's a unit trust?

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Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

A unit trust is one of the primary ways Britons invest their money. It’s a managed, collective investment in a number of wide-range of individual securities, which might include shares, bonds and gilts. The trust is sold by “units,” though a unit trust isn’t limited in size — if more investors buy in, more units are simply offered for sale.

The major benefit unit trusts offer to consumers is the ability to purchase a diversified bundle of securities for one price—called the trust’s “net asset value” (NAV). By buying into a unit trust, investors who don’t have the time or inclination to research individual shares can entrust their money to a fund manager whose job it is to buy and sell securities depending on market conditions, the goal being to outperform the market at large.

Unit trusts are like snowflakes — no two are exactly the same, and they vary greatly in what asset class they invest. Generally speaking, higher risk unit trusts reward investors with higher returns, but come with a great deal of potential volatility. Since they are actively managed, and thus require a great deal of overhead — i.e., folks sitting at computers in offices — unit holders are assessed an annual fee called the total expense ratio (TER) that generally runs from 1.0% to 2.5% of the fund’s net asset value. For this reason, in order for you to make money in any given year, the unit trust’s value must increase by more than the TER.

Because of this high fee structure, Wealthsimple advises its clients to invest instead in ETFs, or exchange trades funds, which are bundles of stocks or bonds that mirror the performance of the overall market. Unlike unit trusts, ETFs have no fund managers, so they boast considerably lower management fees. Even better than that, in study after study, market-mirroring ETFs and index funds outperform actively managed funds over the long term.

Last Updated 29 November 2017

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