ETF or LIC? Break down two asset classes

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

When we think of the local stock market, it’s usually businesses that come to mind.

The opportunity to add a part of a promising technology developer, innovative biotech, or top retailer to your portfolio can be an exciting prospect.

But what if you could increase your exposure to a whole range of stocks with just one investment?

In this article:

This is where Exchange Traded Funds (ETFs) and Listed Investment Companies (LICs) come in.

Both products are publicly traded just like a company, but they broaden your horizons by investing 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 the financial and accounting consultancy firm Findex Wealth Management.

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

“An exchange-traded fund is an indefinite equity issue that would typically invest in a portfolio that passively tracks a specific benchmark or 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 a LIC?

Scholes has an answer for that too.

He noted: “A listed investment company is generally a closed issue of shares and is an actively managed portfolio of shares, generally with a qualitative and / or quantitative investment approach.

“An LIC will pay a dividend at its discretion and only needs to 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 the sense that an ETF is a trust while an LIC is a business.”

We often call an ETF an open structure, which means that an unlimited number of shares can be issued and it can always meet market demand.

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

“The other major differences concern the philosophy of a passive approach for an ETF, as opposed to an active approach for a PFR,” noted Scholes.

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

This is where the higher costs come in.

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

“By choosing to invest in an LIC, you are essentially supporting this manager to generate a higher after-fee return than a passive index-style ETF. “

Transparency also differs between the two investment structures.

Because it tracks a particular group of stocks, an ETF regularly discloses what is known as 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 common.

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

“It’s important to note that with an ETF, the share price usually matches the net asset value of the shares very closely, whereas with an LIC it can deviate quite sharply.

Advantages and disadvantages

Whichever investment you choose, your risk appetite can have an impact.

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

With passive management, you also benefit from lower fees with ETFs.

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

Ultimately, it is 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 bad investment will impact your performance.

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

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


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