ETF or LIC? Break down two asset classes


What if you could increase your exposure to a whole range of stocks with a single investment?

When you think of the local stock market, companies usually come to mind.

The possibility of adding part of an up-and-coming tech developer, innovative biotech, or blue-chip retailer to your portfolio can be an exciting prospect.

What if you could increase your exposure to a whole range of stocks with a single investment?

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This is where exchange-traded funds (ETFs) and listed investment companies (LICs) come in.

Both products are listed on the stock market – just like a company – but they broaden your horizons with an investment in a stock merger.

The question is: what is the difference between the two?

Wait, what is an ETF?

To define exactly what these investments look like, we turned to the team at financial and accounting consultancy Findex Wealth Management.

Managing Wealth Management Partner Jonathan Scholes explained how these funds work to Proactive.

“An exchange-traded fund is an open-ended equity issue that would typically invest in a portfolio that passively tracks a benchmark or specific index,” he said.

“An ETF is a trust and must distribute all dividends to shareholders, and must also disclose their investment holdings on a daily basis.”

And an LIC?

Scholes has an answer to that too.

He noted, “A listed investment company is typically a closed-end equity issue and an actively managed equity portfolio, typically with a qualitative and/or quantitative investment approach.

“An LIC will pay a dividend at its discretion and need only report its holdings on a monthly or quarterly basis.”

What is the difference?

There are a few differences at play when it comes to these investments – things like cost, transparency, and management styles all vary.

Scholes explained, “The main difference between an ETF and an LIC is the structure, in that an ETF is a trust while an LIC is a company.”

We often refer to an ETF as an open-end structure, which means an unlimited number of shares can be issued and it can always meet market demand.

An LIC, on the other hand, is closed – there are a limited number of shares available and executives must raise capital to issue more shares – just like a company would.

“The other major differences relate to the philosophy of a passive approach for an ETF, versus an active approach for a LIC,” Scholes noted.

While an exchange-traded fund serves to mirror the trading pattern of a certain index – be it the benchmark ASX 200 or the All Ordinaries – a listed investment firm has people behind it who actively choose the actions to follow.

This is where the higher costs come in.

“You should also expect a listed investment company to have higher fees than a listed index fund, given the active management.

“By choosing to invest in an LIC, you are essentially supporting that manager to deliver a higher after-fee return than a passive index-type ETF will deliver.”

Transparency also differs between the two investment structures.

Because it tracks a particular group of stocks, an ETF regularly discloses what is called a net asset value (NAV).

An LIC also reports this information, but their holdings and weightings are not always disclosed, so it may be a little less frequent.

Simply put, the net asset value serves as a barometer of the performance of the investment vehicle – it’s just the total assets on hand minus the liabilities.

“It is important to note that with an ETF the stock price will generally match the net asset value of the stock very closely, whereas with an LIC it can deviate quite dramatically.

Advantages and disadvantages

Whatever investment you opt for can be impacted by your risk appetite.

Because it tracks an index fairly closely, is more transparent, and is open, an ETF often involves less investment risk.

You also benefit from lower fees with ETFs, thanks to passive management.

And as an asset class, ETFs are statistically more likely to outperform their LIC counterparts, thanks to the simpler fee structure.

On the other hand, an LIC has the potential to break free from these market patterns and really shine.

But that opportunity comes with higher risks – and costs like stamping fees to cover recommendations from the active management team.

Ultimately, it’s best to decide which investment vehicle is right for you with the help of a broker.

How can an ETF or LIC strengthen your portfolio?

Scholes concluded, “Investing in an ETF or LIC is an easy way for investors to access a diversified portfolio with many different stocks. This approach reduces the risk that a single bad investment will impact your performance.

“Barriers to entry are generally low, with no minimum investment, no high entry fees and easy access to your money when you need it. This means you can start small and grow over time.

“Understand what you’re investing in and do your research on the performance of the underlying investment in good and bad markets.”


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