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Exchange Traded Funds vs Listed Investment Companies

By Arijeet Chakrabarty

 

Exchange Traded Funds (ETF) or Listed Investment Companies (LICs): it′s an often-held debate between investors. The technical differences between the two often causes confusion among investors, especially when it comes to determining the suitability within one's broader investment profile.

However, to a certain extent the decision as to which one is “best” will come down to personal preference. That said, it′s always worth looking at some key characteristics of both:

The comparison table below highlights some of the key characteristics of ETFs and LICs

 

ETF

LIC

DEFINITION

It is an investment fund traded on the stock exchange, much like stocks.

Similar to a retail managed funds, except instead of buying units you buy shares, which trade on the stock exchange.

RISK DIVERSIFICATION

An ETF, depending on its type, gives you exposure to assets such as shares, bonds, currencies and commodities in a single trade which helps in diversifying risk.

They typically invest in a diversified portfolio of stocks and/or other assets. However, it can also invest in a single asset class like Australian shares or overseas bonds.

PRICING

Due to the open-ended structure, the share price is not affected by the demand and supply and therefore it always trades around its net tangible assets(NTA)

Due to the close-ended structure (fixed number of shares issued) the price is determined by demand and supply and therefore it trades at a premium or discount to NTA.

 

LIQUIDITY

It offers high liquidity as it can bought and sold in the market at any time.

It offers high liquidity as it can be traded easily on the ASX however some LICs can be quite thinly traded.

FEES

Relatively low management fees

Management Expense Ratio (MER) in many cases is below comparably invested unlisted managed funds. 

Investment Strategy

They are passively managed to track an index and not to outperform the index.

They are actively managed designed to outperform the index.

ACCESSIBILTY

Purchased like a share

Purchased like a share

 

 

So what’s the take out message?

Both ETFs and LICs have their place in a portfolio. One needs to consider one's broader investment experience and the level of exposure one wishes to seek. It is also important to understand how the product works and whether it is suitable given an investor’s current investment and risk profile.

Therefore it is worth talking to an adviser before investing to ensure you choose the right product for your needs. 



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