What is an Exchange Traded Fund or ETF?
An ETF is a simple way of investing in large amounts of stocks, bonds or other investments with a small amount of money. See our full video here. For example, if you invest $500 in an ETF which follows the S&P/ASX 200 (INDEXASX: XJO), you’ll get a tiny bit of exposure to all of the 200 shares in the ASX 200.
What is a Listed Investment Company or LIC?
An LIC is an investment company which manages money for its shareholders. Investors can buy shares in the LIC, which manages the pool of money that was invested by its very first investors.
Are ETFs different to Listed Investment Companies?
Yes.
On the surface, they seem to do the same thing. But ETFs and LICs differ in a few important ways:
Strategies
- ETFs are often index funds (see below), smart beta (see below) or (more recently) active strategies
- LICs are often active strategies
Structure
- Inside an ETF is a legal trust, which means when you invest in them you will get ‘units’ instead of shares and ‘distributions’ instead of dividends
- LICs are companies (i.e. they have shares) and pay dividends
Fees
- ETF fees are pretty transparent. They’ll almost always have a management fee and maybe we’ll see performance fees in the future (for active ETFs). Focus on the MER and ICR fee ratios.
- LICs typically charge a management fee (e.g. 1% per year) plus a performance fee for good performance. However, LICs are companies and shareholders also have to foot the bill for expenses and costs (e.g. legal, accounting, marketing, a board of directors, etc.)
Open Versus Closed
- ETFs are fluid and ‘open’. Meaning, typically, every time a new investor buys into the ETF a new ‘unit’ will be created. When the investor sells/withdraws from the ETF, their money will be returned and their units will be deleted (if they are not bought by another investor).
- LICs are closed. Meaning, investors who buy shares must buy them from other investors who are selling. Vice versa. New units/shares in an LIC are NOT created each time an investor buys or sells. That’s why…
Performance
- Most ETFs follow an index, like the Dow Jones or ASX 200, and the ETF’s net asset value (NAV) or ‘unit price’ should follow what the index or ‘market’ is doing.
- LICs are harder to predict. An LIC’s share price is determined not only by the investment performance of the LIC manager but by the pricing of its shares on the market. Sometimes the share price can move above (“premium”) or below (“discount”) the total value of the investments in the LIC’s portfolio.
More information
- For ETFs, the Product Disclosure Statement (PDS) is the best place to find more information on an ETF. Visit the ETF issuer’s website.
- For LICs, the Annual and Half Year Reports are the best places to look. Also, keep an eye on the LIC managers website for regular announcements and sign up to their mailing list, if they have one.
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ETF Explainer Video:
Index Fund Explainer Video:
Managed Fund ETF Video:
Smart Beta ETFs Video:
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