Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) are both popular investment vehicles that allow you to diversify your portfolio in a single, cost-effective transaction.
The main differences between an ETF and LIC are:
- Transparency
- Liquidity
- Certainty
- Fees
- Tax efficiency
- Returns
Learn more about the differences between LICs vs ETFs to decide which option may be right for you.
What is a LIC?
Listed Investment Companies (LICs) are investment companies listed on an exchange. Their business is to invest in other companies and assets including shares, bonds, and property.
When you invest in a LIC, you’re buying shares in the LIC itself and gaining exposure to the LICs many underlying assets. In turn, this provides immediate diversification for your portfolio.
Listed investment companies are actively managed. A team of fund managers make decisions about which assets to buy and sell with an aim to outperform the market.
Best listed investment companies 2021
A sample of the biggest Australian ASX listed investment companies include:
- Australian Foundation Investment Company Limited (AFI)
- Argo Investments Ltd (ARG)
- Milton Corp Ltd (MLT)
- Magellan Global Trust (MGG)
- Capital Investments LTD (MFF)
What is an ETF?
Exchange-traded funds (ETFs) are investment funds that are listed on an exchange.
You buy and sell ETFs the same way you buy individual shares but with an ETF, you’re investing in hundreds, sometimes thousands, of assets at once.
Similar to a listed investment company, you can think of an ETF as a ‘packet’ of investments. A single ETF provides immediate diversification with assets including shares, bonds, property, currencies or commodities.
In general, ETFs focus on a specific region, industry or market and provide access to a wider range of assets than a LIC.
ETFs are usually passive investments that simply track a particular index such as the ASX200 or a physical commodity like gold.
For example, an ETF that tracks the ASX200 index will buy every (or almost every) share/bond/asset in the ASX200.
As such, the ETF passively mimics the performance of the ASX200 and unlike a LIC, its goal isn’t to outperform the index. This removes the need for active buying and selling decisions.
That said, there are also fully or partially actively managed ETFs in the market.
ETF vs LIC
While they share diversification benefits, there are important differences between ETFs and LICs. Let’s take a look at how they differ.
| ETF | LIC | |
| Legal structure | Trust | Company |
| Shares issued | Open-ended; unlimited number of shares issued. | Closed-ended; fixed number of shares issued. |
| Net Asset Value (NAV) | Share price usually tracks closely to the NAV. | Share price can drift significantly from the NAV at a premium or discount. |
| Investment strategy | Passive – track an index as the benchmark. | Actively managed |
| Fees | Low cost due to a passive investment strategy. | Active management attracts higher fees. |
| Dividends | ETFs must distribute dividends to shareholders. | Dividend payment at LIC discretion. |
| Transparency | Disclose investment holdings daily. | Report holdings monthly or quarterly. |
Structure
The biggest difference between a LIC and ETF is their legal structure; an ETF is a trust while a LIC is a company.
As you’ll see below, these different structures impact shares issued, dividends, tax, and reporting.
Shares issued and NAV (Net Asset Value)
A LIC investment is closed-ended. This means there are a fixed number of shares issued in the market and investors can only buy and sell existing shares.
The share price isn’t only determined by the value of underlying assets of a LIC, it’s also influenced by how much demand there is for the LIC itself. This results in a listed investment company often trading at a significant premium or a discount to its Net Asset Value (NAV).
On the other hand, an ETF is open-ended. This means the fund can issue an unlimited amount of shares according to market demand.
If a new investor wants in, they don’t have to trade with an existing shareholder. An ETF’s pool of money grows or shrinks daily depending on new contributions and withdrawals from investors.
Under normal market conditions, an ETF’s share price usually tracks closely to the Net Asset Value of the fund.
Investment strategy
As mentioned, LICs have an active investment strategy with managers aiming to beat the market while most ETFs passively track an index, regardless of what the market does. ETFs generally provide much broader market exposures than LICs.
Fees
Actively managed LICs charge higher management fees than a passive ETF. ETFs can be a more cost-effective way to achieve a truly diversified portfolio.
Dividends
Listed investment companies on the ASX aren’t required to pay dividends to shareholders. Income received from their assets is subject to the Australian company tax rate of 30%. The LIC pays the tax and can hold onto the gains for as long as it wants. Like other companies, the distribution of franked dividends is at management discretion.
As a trust, ETFs are required to distribute any gains directly to shareholders. An EFT dividend may be franked or unfranked and shareholders could receive it as cash or in the form of a dividend-reinvestment plan.
Transparency
ETFs arguably offer more transparency than LICs. They generally disclose their investment holdings and weightings daily so shareholders are up to date with where their money is invested.
Listed investment companies aren’t required to publish their holdings daily and typically report their holdings monthly or quarterly instead. This makes it challenging to assess the real value of the underlying portfolio.
LIC vs ETF: Which is the better option?
At Six Park, we consider ETFs to be superior to LICs. We use carefully selected ETFs as the building blocks of Six Park portfolios for a few reasons:
- Lower fees. Fees can eat into compound returns so it pays to look for ways to minimise costs with any investment vehicle;
- LICs strive to beat the market but it’s actually more common for them to underperform their benchmark. In this scenario investors can lose money on top of the fees;
- ETFs are more transparent about the assets they’re invested in;
- ETFs are more likely to hold their true value reflected by a low level of drift from their net asset value (NAV).
As a Six Park client, you will be invested in a portfolio of high-quality ETFs that are carefully selected by our expert Investment Advisory Committee to match your recommended asset allocation. Our portfolio management fees start at just $6.25 a month for a $2,000 investment.
Get started now with Six Park
Investing in ETFs through Six Park is an efficient, low-cost way to access a diversified portfolio designed for your risk profile.
To start your investment journey with Six Park, click the “Get started now” button. Take our personalised assessment and get your free investment recommendation now.
This article may contain general financial product information but should not be relied upon or construed as a recommendation of any financial product. This information has been prepared without taking into account your objectives, financial situation or needs.
For further details on our service please see our Financial Services Guide at http://www.sixpark.com.au. Past performance is not a reliable indicator of future performance.