Comparing ETFs and LICs

Hi Emily.

Most of the popularity around ETFs is specifically around index funds.

The reason for that is simply because index funds track the market – such as VAS which tracks the ASX 300 index – as opposed to LICs which are a hand-picked portfolio which usually aims to beat the market. In reality, most of these funds fail to do that job consistently over time – stock picking is incredibly difficult.

There are actively managed ETFs too, and inevitably most of these will also fail to beat the market. But many are still popular as investment options because to be honest, many people equate ETFs with smarter, low cost, diversified investing (even when that’s sometimes not the case).

In other cases, people choose LICs which happen to line up with their own investment style. For example, I used to invest in dividend-focused LICs, others might invest in LICs which have a focus on small companies, or growth/value stocks.

Hope that makes sense.

Both Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) are popular investment vehicles that offer investors the opportunity to invest in a diversified portfolio through a single transaction on the Australian Securities Exchange (ASX). However, they differ in several key aspects, which might influence an investor’s decision to choose one over the other.

Structure and Management:

LICs are structured as companies and are closed-ended. This means they have a fixed number of shares in circulation and can trade at a premium or discount to the net asset value (NAV) depending on market demand and supply. They are actively managed, meaning that a management team makes decisions about which assets to buy and sell with the goal of outperforming the market.

ETFs, on the other hand, are usually open-ended and can issue or redeem shares based on investor demand. This generally allows ETFs to trade close to their NAV. Most ETFs are passively managed and aim to replicate the performance of a specific index, such as the S&P/ASX 200.

Investment Approach:

The active management approach of LICs can be appealing to investors who believe that skilled managers can achieve returns that beat the market. However, this can also lead to higher management fees compared to ETFs. Additionally, the performance of LICs heavily depends on the expertise of the management team.

ETFs typically follow a passive investment strategy, which involves lower management fees. This approach is based on the idea that it is difficult to consistently outperform the market, so it aims to mirror the performance of a particular index.

Liquidity:

LICs might trade at a discount or premium to their NAV because they are closed-ended. This can affect the liquidity and pricing of the shares. ETFs generally offer better liquidity due to their open-ended nature and typically trade close to their NAV.

Dividend Distribution:

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