Exchange Traded Funds (ETFs) and Listed Investment Companies (LICs) are both assets that are able to be bought and sold on the Australian Securites Exchange (ASX). Their popularity with investors in recent years has exploded, resulting in over 200 different funds now being available on the ASX.
|Exchange Traded Fund (ETF)||Listed Investment Company (LIC)|
Generally passively managed, meaning they simply try to replicate an index returns, rather than outperform them
Generally actively managed, therefore try to outperform an index or provide an absolute return to investors.
Shares on issue
Open ended, meaning that units are created or redeemed based on the demand on the share market.
Closed ended, meaning that there is a limited supply of shares available unless the manager raises capital.
PRICE TO NET ASSET VALUE (NAV)
When an Investor buys or sells an ETF there is a market maker on the other side of the trade. The price they offer is generally very close to the Net Asset Value of the fund. NAV is published daily.
As LICs are close ended, the price is based on the price that investors are prepared to buy or sell the share for on any given day. As a result the price of the share may trade at a large premium or discount to the NAV. LICs only need to announce their NAV on a monthly basis, however some LICs provide more regular updates.
An ETF must distribute all of its income each year. This will be returned to investors in the form of dividends (franked and unfranked), foreign source income, capital gains and capital losses.
A LIC only distributes its income when its board declares a dividend. As LICs pay tax at the company tax rate, generally the distributions are fully franked dividends.
As an ETF must distribute all of its income, the dividend amount can vary dramatically as it is determined by the underlying index performance.
As a LIC has flexibility of when and how much income it returns to investors, most LICs aim to provide a steady stream of dividends and attempt to avoid fluctuations. Listed Investment Trusts (LITs) distributions are more like ETFs.
Generally ETFs are low cost as they simply aim to track an index rather than outperform. However, there are now a number of actively managed ETFs with higher fees.
LICs tend to be higher cost as the investor is paying for management’s skill to outperform over the long term. A number of LICs have outperformance fees attached where additional fees are paid if the manager outperforms.
SOME MORE ON NET ASSET VALUESNow that we have ascertained the key differences between ETFs and LICs, you might see one of the main differentiators is the concept of LICs trading at a premium or discount to Net Asset Values (NAVs), also referred to as Net Tangible Assets (NTA).To explain this, it is best to look at an example. Lets take a LIC called XYZ company. Today it is trading for $0.80 per share, however the value of all the underlying investments is worth $1 per share. In this case the LIC is trading at a $0.20 discount to the value of its assets. On the flipside would be a LIC trading at $1.20 per share with underlying investments worth $1 per share. This would be trading at a $0.20 premium to its NAV.Rationally you might think a LIC would always trade at a similar price to its NAV but the share market is not always rational. Reasons for a LIC being priced differently to its NAV include a number of factors such as: general market sentiment, out/under performance of LIC compared to its peers, asset class the LIC is invested in and the liquidity of the share. ETF Watch tracks NAVs of all the LICs that we follow, as well a historic NAVs, which is a useful resource if you are interested in investing in LICs.LICs must report their NAV on a monthly basis, and must report the NAV of the fund on a pre tax basis and post tax basis. The post tax NAV is generally lower than pre tax due to capital gains that would be payable with full liquidation of the fund.As mentioned in the table above, ETFs have a market maker on the other side of the trade, this means they tend to track their NAV very closely. Sometimes the ETF price can drift from its NAV particularly in times of high volatility but this tends to be resolved fairly quickly. As a result, ETF Watch does not track the NAVs of ETFs and just reports on the ETF price.
Risks of ETFs and LICsETF Watch is an information resource only. We are not licensed to provide general or personal financial advice. Therefore you should consider consulting a financial adviser before investing. As with all investments, certain risks apply when investing in ETFs & LICs.
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