Listed Investment Companies (LIC) vs Exchange Traded Fund (ETF)

At Beyond the Ticker we are big proponents of long term passive investments especially for people with limited investment knowledge. LIC’s or ETF’s are a fantastic way to gain exposure to large portions of the market and reduce your stock selection risk (picking the one company that goes down 20% in a bull market). By combining a incremental investment strategy with an ETF or an LIC anyone with limited knowledge and little research can secure the average market return which over the last 20 years has been 8.1% for the ASX 200. Assuming an initial investment of $10,000 and monthly contributions of $500 after 20 years that will be $335,275. I will then apply this to my personal situation I am currently 25 and aim to retire at 55. So after 30 years with an initial $10,000 invest along with $1,000 monthly contributions (Got to be ambitious if you want to retire young) I would have $1,538,726. Without even needing super, additional savings or drawing down on my invested amount at 55 I will be getting $61,549 a year from dividends assuming the average 4% dividend yield.

It is our dream to become financially free and in 30 years I will have achieved this and will be earning $60,000 a year from investments alone. Now this is a good time to remember that past result are not an indication of future results so there is variability in the assumptions made. Additionally, everyone is in a different financial situation and this is not advice so before investing seek advice from a licensed professional. If you want to put in your own assumption and see where you will be in 20 or 30 years you can google investment calculator or use this link https://moneysmart.gov.au/budgeting/compound-interest-calculator

Now I have given you the dream to aspire towards lets assess the LIC and ETF options to make the dream a reality. Before we explore further I would like to disclose that I currently have holdings in one of the LIC’s that will be discussed today, AFI. As at 1 June 2020 AFI was the largest LIC in terms of market cap. There are 100’s of LIC’s listed on the ASX if you want to do your own research but today we will assess the top nine largest by marketcap.

Table 1: Summary of LIC’s

Table one has been constructed with dark green shading to represent the best option in that category green being the second best option and light green being the third best option. Looking across the table the more green the better although most of these investment options have merit. Again remember past performance isn’t an indication of future performance.

In table one above stay clear of is LSF as they are an absolute return fund. This means that they take long and short positions and gear the portfolio. This is not inherently a bad thing but does provide excess risk for investors. Additionally, their fee structure is criminal with any alpha (additional return) generated being eroded by high performance fees.

WAM and WLE are both owned by Wilson Asset Management. They are both very attractive investments with strong historical returns and high dividend yield. The one draw back for these two companies is that the management fees are significantly higher than some of their peers.

 MXT is a good option if you want to diversify further and have access to Australian corporate debt, this consists of bonds issued by large Australian companies. This is a difficult sector for an individual investor to gain exposure to so this listed option opens this sector up to smaller investors. One positive about corporate loans is that they are considered safer than owning stock. If a company goes bankrupt they pay off the corporate debt before any money is returned to shareholders.

To conclude there is no absolute right answer in this group, an investor might even want to invest across a few of these funds to diversify their risk even further.

There are thousands of ETF’s to invest in so we wont cover them all in this article but if you are interested follow this link to find a complete list https://www.marketindex.com.au/asx-etfs.

The ETF’s shown below are Australian index tracking as these will give the best comparisons for the above listed LIC’s.

Table 2: Summary of ETF’s

Its worth noting that the ETF’s are only 75% franked. This means that you wont get as many tax credits as you would if you invested in an LIC that is 100% franked. This has implications come tax time.

The summary above shows that the ETF’s are all very similar in nature as they are tracking the same benchmark. Probably the most important thing to look for is how much they are charging in fees the lower the better.

One drawback of ETF’s is that you will never outperform the market however this is also the biggest positive and you will never significantly underperform the market.

So whether you decided to go with an ETF and LIC or a mixture of both start moving towards financial freedom today and remember seek professional financial advice.

Disclaimer

Advice in the Material is provided for the general information of readers and viewers (collectively referred to as "Readers") and does not have regard to any particular person's investment objectives, financial situation, or needs. Accordingly, no Reader should act on the basis of any information in the Material without properly considering its applicability to their financial circumstances. If not properly qualified to do this for themselves, Readers should seek professional advice.

Investing and trading involves the risk of loss. Past results are not necessarily indicative of future results.

The decision to invest or trade is for the Reader alone. We expressly disclaim all and any liability to any person, with respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance upon the whole or any part of the Material.