When it comes to investing, there are a lot of different options to choose from. Two of the most popular investment products are ETFs (Exchange Traded Funds) and LICs (Listed Investment Companies). But what are the differences between them? And which one is right for you? In this post, we will take a closer look at both ETFs and LICs and discuss the pros and cons of each. By the end of this article, you will be able to make an informed decision about which type of investment is right for you!
What is a LIC?
LICs or Listed Investment Companies allow everyday investors to buy shares in a company that invests in a range of different assets, such as stocks, bonds and property. LICs are similar to managed funds, but they have the added benefit of being listed on the ASX, which makes them very liquid (meaning you can sell your shares at any time).
One of the main advantages of LIC’s is that they offer investors a way to invest in assets that would otherwise be too difficult or expensive to access. For example, if you want to invest in overseas stocks, you can do this through a LIC that invests in international companies.
An example of a well known LIC would be the Australian Foundation Investment Company which is one of Australia’s oldest (and largest) LIC’s, having been established in 1936. The AFIC fund invests in a mix of Australian and international assets, giving investors access to both local and global markets. That being said only less than 1% of the AFIC portfolio is invested in the international market! but hey this is a blog about LIC’s as a wealth vessel not an AFIC review (keep your eyes out for that one in the future ;))
What is an ETF?
ETF stands for exchange traded fund, this means that they are listed on an exchange such as the ASX and can be traded like any stock. ETFs are a type of index fund which means that they track the performance of a particular index, such as the ASX 200 or S&P 500.
One of the main advantages of ETFs is that they offer investors a very low cost way to invest in a range of different assets. For example, one of the most popular Australian ETFs, the Betashares A200 ETF offers investors exposure to all 200 companies listed on the ASX in one single purchase for a very small Management fee.
So what are the differences between LICs and ETFs?
There are a few key differences between LICs and ETFs that you need to know about:
– Fees: The fees for investing in a LIC are usually higher than the fees for investing in an ETF.
– Diversification: One of the advantages of ETFs is that they offer investors a very low cost way to invest in a range of different assets. LICs usually invest in a smaller number of assets, which can make them more risky.
– Tracking: ETFs track the performance of an index, whereas LICs can track the performance of an index or they can be actively managed, meaning that the manager will choose which stocks to invest in.
LIC vs ETF Management Fees
In general (but not always) LIC’s tend to have higher management fees than those of an ETF. This is due to the more active approach of a LIC compared to the ‘set and forget’ index tracking nature of the ETF’s.
To give you an idea of the difference in fees between the two investments we mentioned before – AFIC has a Management fee of 0.14% ($14 per $10,000 invested) and A200 has a Management fee of 0.07% ($7 per $10,000 invested). While this does not sound like a whole lot it can definitely add up to a few extra pints in the long run when it compounds over year and years and years!
Do LIC’s and ETF’s pay a Dividend?
Both LIC’s and ETFs can pay a dividend, however it is important to remember that not all of them do. Technically the dividends that are paid by ETF’s are called Distributions, this is due to the ETF provider distributing the dividend they have received from the multitudes of companies in the portfolio to you the shareholder. Some ETF’s won’t have distributions due to the underlying companies not providing dividends, you might see this in ETF’s that invest heavily overseas where companies like to reinvest the profits focusing solely on capital growth instead of giving the money back to the shareholder.
The way that LIC’s are set up means they are under no obligation to pay dividends, they can forego the dividend and keep the money in the fund.
What are some popular LIC’s in Australia?
Some of the most popular LICs in Australia include:
– Australian Foundation Investment Company Ltd (AFIC)
– Argo Investments Limited (ARG)
– Milton Corp (MLT)
What are some popular ETF’s in Australia?
Some of the most popular ETFs in Australia include:
– Betashares A200 ETF (A200)
– iShares S&P/ASX 200 ETF (IOZ)
– Vanguard Australian Shares ETF (VAS)
How do you purchase a LIC or ETF?
The beauty of both of these products is that they are both listed on the ASX and can be traded like any other stock. You can purchase them through a broker or online trading platform, just pop the ticker in your trading platform such as Pearler or Commsec and off you go!
So which one is better?
The answer to this question depends on a number of factors, such as your investment goals, risk appetite and budget. If you’re looking for a low-cost way to invest in a diverse range of stocks, then ETFs are the right option for you. However, if you’re looking for more targeted exposure to certain sectors or companies, then LICs may be a better option.
Thank you for reading! We hope this article has helped you to understand the differences between ETFs and LICs.