Q For years I have bought and sold shares on the Australia Stock exchange (ASX). Could you please explain the difference between Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) that can be bought and sold on the ASX? I see the value in diversifying my portfolio but I have previously avoided Managed funds because of entry fees and adviser costs.
A Listed Investment Companies (LICs) or Listed Investment Trusts (LITs) areessentially managed investment funds that can be bought and sold on the ASX on a similar basis to a conventional share. LICs in Australia predominately offer exposure to Australian and International shares but may include exposure to other asset classes such as property and fixed interest.
LICs are closed ended so there are a finite number of shares available. LIC’s do not regularly issue new shares, so the price of the LIC not only reflects the underlying value of the portfolio of assets but also demand for the expertise of the Investment Manager. Whilst LICs are obligated to report their net tangible assets (NTA), the price of the LIC is determined by the buyer and the seller. Consequently LIC’s will often trade at a premium or discount to their net tangible assets (NTA) which can be a major disadvantage depending on the prevailing demand for the LIC.
Exchange Traded Funds (ETFs) can be bought and sold on the ASX on a similar basis as a LIC. The key difference is that ETFs are open ended and the number of units in the fund is not fixed. Consequently the price is not determined by supply and demand or the expertise of the manager but rather the NTA of the underlying portfolio of assets.
Whilst there are some actively managed ETF’s, the vast majority of ETFs replicate an investment index. As such they offer a low cost exposure to an investment market or asset class. Some of the most popular funds replicate the ASX200, the S&P 500 and the MSCI world index. ETF’s can also provide exposure to currencies, commodities, oil and energy and precious metals such as Gold.
Unlisted Managed Funds still provide the largest range of investment options in the market. Offered either directly by the Fund Manager or via Financial Advisers, most do not charge entry costs. Adviser costs are negotiated between you and the adviser and should be based on advice costs not product costs.
As an alternative to traditional Managed Funds, consider the recently launched ASX mFunds. mFunds are unlisted Managed Funds that are available to investors via the ASX. It’s early days for these investments, as the range of options and access is limited. Few of the major broking houses offer access to mFunds.
Costs for any investment will vary depending on whether the investment company or fund is actively trading a portfolio or simply replicating an index.
Make sure you understand the underlying investment you are buying. They should be appropriate to your investment time frame and your tolerance for investment risk. Research the quality of the investment manager and seek appropriate professional advice.