An ETF and a unit trust both allow you to invest in a diversified portfolio without buying every underlying asset yourself, but they work differently.
The biggest difference is how you buy and sell them. An exchange-traded fund, or ETF, is listed on a stock exchange and trades throughout the day like a share. A traditional unit trust is bought or sold directly through an investment platform or fund provider, usually at a price calculated from the fund’s net asset value.
Both can be useful for long-term investing. The better choice depends on how much control you want, how often you plan to trade, the fees involved and whether you prefer passive or active management.
What is an ETF?
An ETF is an investment fund that trades on a stock exchange.
The Johannesburg Stock Exchange describes ETFs as listed investment products that provide exposure to a basket of shares, bonds, commodities or other assets. Investors can buy and sell them in much the same way as ordinary shares.
For example, an ETF might track:
- The FTSE/JSE Top 40
- South African government bonds
- Global shares
- Gold
- Property
- A particular sector or investment theme
Instead of buying dozens of individual investments, you can get exposure to the entire basket through one ETF.
What is a unit trust?
A unit trust pools money from many investors into one professionally managed investment portfolio.
In South African regulation, unit trusts fall under the broader term collective investment schemes. The Collective Investment Schemes Control Act changed the formal terminology, although “unit trust” is still widely used by investors and financial institutions.
When you invest, you buy units representing your share of the portfolio.
The fund manager then invests the pooled money according to the fund’s mandate.
What is the main difference between an ETF and a unit trust?
The biggest structural difference is that an ETF is traded on an exchange, while a traditional unit trust is not.
With an ETF, the market price can move throughout the trading day.
With a unit trust, transactions are generally processed using the fund’s calculated unit price rather than an intraday exchange price.
That distinction affects how quickly you can trade and how much control you have over the purchase price.
Are ETFs always passive investments?
Not anymore.
Traditional ETFs are commonly designed to track an index passively. For example, a Top 40 ETF may simply aim to reproduce the performance of the FTSE/JSE Top 40 rather than choosing individual shares based on a fund manager’s opinion.
The JSE now also lists actively managed ETFs, commonly called AMETFs. These use an active investment strategy while retaining the exchange-traded structure.
So the simple idea that “ETF means passive” is no longer universally correct.
Are unit trusts actively managed?
Many unit trusts are actively managed, but not all of them.
An actively managed unit trust has a portfolio manager deciding which investments to buy, hold or sell according to the fund’s mandate.
However, index-tracking unit trusts also exist. The more accurate comparison is therefore not simply:
ETF = passive
Unit trust = active
Instead, you need to look at both the investment strategy and the legal or trading structure.
Which one usually costs less?
Passive ETFs often have lower ongoing management fees than actively managed unit trusts.
That is partly because an index-tracking fund does not require a large investment team to continually research and select securities.
However, the total cost depends on more than the fund’s management fee.
ETF investors may face costs such as:
- Brokerage
- Platform fees
- Bid-ask spreads
- Fund management fees
Unit-trust investors may face:
- Fund management fees
- Administration fees
- Platform fees
- Adviser fees where applicable
The JSE describes ETFs as a relatively low-cost way to gain diversified exposure, but you should still compare the full cost structure of the products you are considering.
What is a bid-ask spread?
The bid-ask spread is the difference between the price buyers are willing to pay for an ETF and the price sellers are asking.
Because ETFs trade on an exchange, this spread can create a small additional trading cost.
For highly liquid ETFs, the spread may be narrow. Less frequently traded ETFs can have wider spreads.
Traditional unit trusts do not trade through an exchange order book in the same way, so bid-ask spreads are not normally part of the investor experience.
Can you buy an ETF at any time?
You can generally buy or sell a JSE-listed ETF while the market is open. The market price can move throughout the trading session.
This gives you more control over the timing and price of your trade.
The JSE says ETFs can be bought and sold in the same way as ordinary shares.
For long-term investors making monthly contributions, however, intraday trading may not be particularly important.
How are unit trusts priced?
Unit trusts generally use a net asset value based on the value of the investments held by the fund.
You submit an instruction to invest or withdraw, and the transaction is processed according to the fund’s pricing rules and cut-off times.
You therefore do not normally sit in front of an exchange screen choosing an exact market price.
For investors who simply want to invest a fixed amount every month, that can make the process relatively straightforward.
Which gives you better diversification?
Both can provide excellent diversification.
An ETF may hold dozens, hundreds or even thousands of underlying securities.
A unit trust can do the same.
The JSE highlights diversification as one of the main benefits of ETFs because a single product can provide exposure to a wide range of underlying assets.
The real question is what the particular fund owns.
A broad global equity ETF may be much more diversified than a concentrated unit trust holding 20 shares.
But a diversified multi-asset unit trust may spread money across shares, bonds, cash and offshore investments in a way that a specialised ETF does not.
Do not assume that one structure is automatically more diversified than the other.
Which offers more investment choice?
Both markets now offer substantial choice.
ETFs can provide exposure to:
- South African equities
- Global equities
- Bonds
- Property
- Commodities
- Factor strategies
- Sector strategies
- Thematic investments
- Multi-asset strategies
Unit trusts cover many of the same areas and can also offer highly specialised active strategies.
Your choice should be based on the underlying investment rather than simply whether it is called an ETF or unit trust.
Can you invest monthly in ETFs?
You do not necessarily need a large lump sum to invest in ETFs.
The JSE notes that investors can access ETFs through investment plans and online platforms, including options that support regular monthly contributions.
Some platforms also support fractional investment, depending on their structure.
That has made ETFs much more accessible to investors who want to start with smaller amounts.
Can you debit order into a unit trust?
Monthly debit orders are a common way to invest in unit trusts.
You can generally choose a fixed monthly contribution and have it invested automatically.
This can be convenient for people who want to build an investment gradually without manually placing trades.
ETF investment platforms can now offer similar automated investing, so this difference is smaller than it used to be.
Are ETFs safer than unit trusts?
Neither structure is automatically safer.
Investment risk depends largely on what the fund owns.
For example, an ETF holding volatile technology shares could be riskier than a conservative unit trust investing mostly in bonds and cash.
Likewise, an equity unit trust could experience substantial losses during a market decline.
Diversification can reduce the risk of relying on one company or asset, but it cannot eliminate market risk.
The JSE specifically warns that ETF prices fluctuate along with the value of their underlying investments.
Can an ETF lose money?
An ETF can lose money if the value of its underlying investments falls.
If an equity index drops by 20%, an ETF tracking that index will generally also fall, subject to tracking differences and costs.
Being diversified does not mean the investment cannot decline.
It means you are less dependent on the performance of one individual asset.
Can a unit trust lose money?
A unit trust can also lose money.
Its value rises and falls with the investments held inside the fund.
An equity unit trust can experience significant market declines, while a money-market or short-term fixed-income fund will generally have a different risk profile.
Always look at the fund mandate and risk classification rather than assuming “unit trust” means low risk.
How are ETFs taxed in South Africa?
An ETF held in a normal taxable investment account can potentially create tax consequences from dividends, interest and capital gains.
For individuals, South African dividends from companies are generally subject to 20% dividends tax, typically withheld before the dividend reaches the investor.
Capital gains can also become taxable when an investment is disposed of.
For the 2027 year of assessment, individuals have an annual capital-gains exclusion of R50,000, and the maximum effective CGT rate for an individual is 18%.
The exact treatment depends on the underlying investment and your circumstances.
Are unit trusts taxed differently?
Traditional unit trusts can also generate taxable distributions or capital gains.
The precise tax treatment depends on what the portfolio owns and the nature of the returns. So choosing a unit trust instead of an ETF does not automatically remove tax.
Both structures can also be held through certain tax-efficient wrappers where the product qualifies.
Can ETFs be used in a tax-free savings account?
Many ETFs qualify for use within South African tax-free investment accounts.
The JSE notes that most JSE-listed ETFs are TFSA compliant.
Inside an approved tax-free investment, returns are exempt from income tax, dividends tax and capital gains tax.
From 1 March 2026, the annual South African tax-free investment contribution limit is R46,000, while the lifetime contribution limit remains R500,000.
Not every investment product automatically qualifies, so check the platform and fund before investing.
Can unit trusts be held in a tax-free account?
Qualifying unit trusts can also be offered inside approved tax-free investment accounts.
SARS allows tax-free investments to be offered through authorised providers including managers of registered collective investment schemes, subject to the applicable rules.
That means the tax-free benefit is linked to the approved account structure, not exclusively to ETFs.
Which is better for a beginner?
Either can work for a beginner.
A broad, low-cost ETF can be attractive because it offers diversification with relatively simple rules.
The JSE itself identifies ETFs as suitable for new investors seeking diversified exposure without researching every individual security.
A unit trust can also be beginner-friendly, particularly if you want a professional manager to make investment decisions and you prefer automatic monthly contributions.
The better option depends on what you want from the investment.
When might an ETF make more sense?
An ETF may suit you if you:
- Prefer low-cost index investing
- Want to choose your own asset allocation
- Like seeing market prices in real time
- Want to buy and sell through an investment platform
- Prefer transparent exposure to a specific index or market
- Are comfortable managing your own portfolio
It can also be useful if you want simple exposure to a broad market such as South African equities or global shares.
When might a unit trust make more sense?
A unit trust may suit you if you:
- Want an active fund manager
- Prefer a managed investment approach
- Want a multi-asset portfolio
- Do not care about intraday trading
- Prefer simple debit-order investing
- Use a financial adviser or managed platform
Some investors also prefer unit trusts because they want a manager making decisions about asset allocation rather than selecting multiple ETFs themselves.
Can you own both?
You do not have to choose only one.
A portfolio can contain both ETFs and unit trusts.
For example, an investor might use low-cost ETFs for broad equity exposure while using an actively managed unit trust for bonds, income or a specialist strategy.
The important question is whether every investment has a clear role in the overall portfolio.
Owning several ETFs and unit trusts that all hold essentially the same shares does not necessarily improve diversification.
What should you compare before investing?
Compare the actual products rather than choosing purely by label.
Look at:
- Investment objective
- Underlying assets
- Risk level
- Total fees
- Past performance
- Benchmark
- Active or passive strategy
- Local versus offshore exposure
- Income distributions
- Tax implications
- Minimum contribution
- Platform charges
Past performance should not be treated as a guarantee of future returns.
Fees also deserve particular attention because even relatively small annual differences can compound over a long investment period.
ETF or unit trust: which is better?
Neither is universally better.
An ETF can be a strong choice if you want low-cost, transparent and flexible market exposure, particularly through passive index investing.
A unit trust can be more suitable if you want professional active management, a managed asset-allocation strategy or a simpler traditional investment structure.
The distinction is also becoming less rigid because actively managed ETFs and passive unit trusts now exist.
For a long-term investor, the more important questions are what the fund owns, how much it costs, how much risk you are taking and whether the investment fits your financial goal.
A well-chosen ETF can outperform a poorly chosen unit trust, and a strong unit trust can outperform an unsuitable ETF. The structure matters, but the investment inside it matters more.
