ETFs vs LICs: What is the difference?

Key highlights:

• Exchange-traded funds (ETFs) and listed investment companies (LICs) are both popular investment options in Australia, but they differ in their investment structure, management style, liquidity, and transparency.
• ETFs are typically passively managed and aim to track the performance of an underlying index, while LICs can be actively or passively managed and aim to outperform their benchmark index.
• ETFs generally offer higher liquidity and transparency, while LICs may trade at a discount or premium to their net asset value (NAV) and may only disclose their top holdings on a quarterly basis. Ultimately, the choice between ETFs and LICs will depend on an investor's individual investment goals, risk tolerance, investment horizon and investment strategy.

What is the difference between ETFs vs LICs?

The main difference between ETFs and LICs is their legal structure. ETFs are open-ended investment funds that are traded on an exchange like shares, while LICs are closed-ended investment companies that issue a fixed number of shares, which are bought and sold on the Australian Securities Exchange (ASX).

ETFs also generally have lower management costs and disclose their net asset value daily, while LICs often have higher management costs, are actively managed, and disclose their NAV monthly or quarterly.

In addition to their legal structure, there are several other differences between ETFs and LICs that investors should consider.

One key difference is their management style. ETFs can be passively or actively managed but are usually passively managed. Passive ETFs aim to track the performance of an underlying index, such as the S&P/ASX 200 or NASDAQ-100, while active ETFs aim to outperform it by using a variety of investment strategies.

On the other hand, LICs can also be passively or actively managed, but they’re usually actively managed with the aim of generating income or capital growth for shareholders. However, active management can result in higher fees and costs for LICs, which can impact their performance and ultimately affect shareholder returns.

Another difference is the way they are taxed. ETFs and LICs are taxed in the same way as shares, with capital gains tax applied when selling the security for a profit. However, the tax implications for LICs may be more complex due to their active management style, which may result in higher turnover and capital gains distributions.

Management costs are another key difference between ETFs and LICs. ETFs generally have lower management costs than LICs due to their passive management style and lower overheads. This can result in lower fees for investors, which can impact their returns over the long term. However, some actively managed ETFs may have higher management fees due to the additional costs of research and analysis required for active management.

Finally, the way they are traded and priced is different. ETFs trade on an exchange like shares, and their prices fluctuate throughout the trading day based on supply and demand. In contrast, LICs also trade on the ASX, but their market price may trade at a discount or premium to their net asset value (NAV). ETFs disclose their NAV daily, which represents the total value of the assets in the fund divided by the number of outstanding units. LICs disclose their NAV monthly or quarterly, depending on their reporting requirements.

Check the table below for a quick guide on the main differences between ETFs and LICs.

Compare ETFs vs LICs

Understanding exchange-traded funds (ETFs)

An exchange-traded fund (ETF) is an investment fund traded on a stock exchange that tracks the performance of a specific index or sector. ETFs can be bought and sold throughout the trading day, and offer investors low-cost, diversified exposure to various markets and asset classes. ETFs are more transparent and tax-efficient than LICs and tend to have lower fees.

🎓 Learn more: ETFs vs Stocks: Which investment is right for you?→

What are the benefits of investing in ETFs?

There are several benefits of investing in ETFs:

• Diversification: ETFs provide access to a diversified portfolio of securities, which can help to reduce risk and minimise exposure to individual stock or sector fluctuations.
• Low fees: ETFs are generally less expensive than actively managed mutual funds, as they are typically passively managed and have lower operating costs.
• Liquidity: ETFs can be bought and sold throughout the trading day, providing investors with greater flexibility and the ability to respond quickly to market changes.
• Transparency: ETFs are required to disclose their holdings on a daily basis, providing investors with greater transparency and visibility into the assets they hold.
• Tax efficiency: ETFs are generally more tax-efficient than mutual funds, as they have lower capital gains distributions and can be sold without triggering a taxable event.

Overall, ETFs can be a cost-effective and flexible investment vehicle for investors seeking exposure to a diversified portfolio of securities.

💡Learn more: Explore the highest return ETFs in Australia→

Understanding listed investment companies (LICs)

A listed investment company (LIC) is a type of investment vehicle that is traded on a stock exchange and provides investors with exposure to a diversified portfolio of assets, such as stocks, bonds, or real estate. LICs are closed-end funds, which means they issue a fixed number of shares that trade on the stock exchange, and they do not issue or redeem shares based on the underlying value of the assets. LICs are typically actively managed and can offer high-yield investments with the potential for capital growth but tend to have higher fees than ETFs.

What are the benefits of investing in LICs?

Here are some potential benefits of investing in LICs:

• Active management: LICs are actively managed, which means that professional investment managers actively buy and sell assets in the portfolio to achieve the fund's investment objectives. This can potentially lead to higher returns than passive index tracking strategies.
• High yields: LICs can provide investors with high yields in the form of regular dividends, as they can choose to distribute their profits to shareholders.
• Diversification: Like ETFs, LICs provide investors with access to a diversified portfolio of assets, which can help to reduce risk and minimise exposure to individual stock or sector fluctuations.
• Stability: LICs can provide stability in volatile markets, as the closed-end structure of the fund means that the number of shares is fixed, which can help to reduce the impact of investor sentiment on the fund's performance.

Alternative investments that might not otherwise be available for retail investors, like private equity, venture capital and strategies using over-the-counter securities.

It's important to note that LICs also have some potential drawbacks, such as higher fees and the potential for the fund's shares to trade at a discount to their net asset value.

Is an ETF or LIC right for you?

Deciding whether an ETF or LIC is right for you depends on your investment goals and preferences. Some factors to consider when making this decision include:

• Investment style: ETFs are typically passively managed and seek to track the performance of a particular index or sector, while LICs are actively managed and seek to outperform the market. If you prefer a more hands-off investment approach, an ETF may be a better fit. If you prefer an actively managed portfolio with the potential for higher returns, a LIC may be a better fit.
• Fees: ETFs tend to have lower fees than LICs, as they are typically passively managed and have lower operating costs. If fees are a primary concern, an ETF may be a better fit.
• Yield: LICs and ETFs can both offer high yields in the form of regular dividends. If you are seeking regular income from your investments, both of these products can be a good fit for your portfolio.

Ultimately, the decision of whether to invest in an ETF or LIC depends on your individual investment goals and preferences.

List of the top ETFs on the ASX

Here are some of the biggest ETFs traded on the ASX:

• BetaShares Australia 200 ETF ($A200): Tracks the performance of the S&P/ASX 200 Index, which represents the largest 200 companies on the ASX.
• Vanguard Australian Shares Index ETF ($VAS): Tracks the performance of the S&P/ASX 300 Index, which represents the largest 300 companies on the ASX.
• iShares Core S&P/ASX 200 ETF ($IOZ): Tracks the performance of the S&P/ASX 200 Index, which represents the largest 200 companies on the ASX.
• BetaShares NASDAQ 100 ETF ($NDQ): Tracks the performance of the NASDAQ-100 Index, which represents the largest 100 non-financial companies listed on the NASDAQ exchange.
• SPDR S&P/ASX 200 Fund ($STW): Tracks the performance of the S&P/ASX 200 Index, which represents the largest 200 companies on the ASX.
• Vanguard MSCI Index International Shares ETF ($VGS): Tracks the performance of the MSCI World ex-Australia Index, which represents large and mid-cap stocks across 23 developed markets outside of Australia.
• VanEck Vectors MSCI World ex Australia Quality ETF ($QUAL): Tracks the performance of the MSCI World ex Australia Quality Index, which represents a portfolio of high-quality companies across 23 developed markets outside of Australia.
• Vanguard Australian Property Securities Index ETF ($VAP): Tracks the performance of the S&P/ASX 300 A-REIT Index, which represents the largest and most liquid property trusts listed on the ASX.
• BetaShares Global Sustainability Leaders ETF ($ETHI): Tracks the performance of the NASDAQ Future Global Sustainability Leaders Index, which includes companies with strong sustainability practices.
• iShares Global Healthcare ETF ($IXJ): Tracks the performance of the S&P Global 1200 Health Care Sector Index, which includes companies involved in pharmaceuticals, biotechnology, and medical devices.

List of the top LICs on the ASX

Here are some of the biggest LICs listed on the ASX:

• Australian Foundation Investment Company ($AFI): The largest LIC on the ASX, AFI is a diversified portfolio of blue-chip Australian stocks.
• Argo Investments ($ARG): A diversified portfolio of Australian and international stocks, with a focus on large-cap companies.
• Milton Corporation ($MLT): A portfolio of blue-chip Australian stocks, with a focus on companies with strong dividend yields.
• Platinum Capital Limited ($PMC): A portfolio of global equities with a focus on large-cap stocks, managed by experienced investment professionals, with a strong track record of outperforming the S&P/ASX 200 index.
• Future Generation Investment Company ($FGX): A diversified portfolio of Australian equities managed by leading fund managers, with a focus on social impact investing.
• WAM Capital ($WAM): A portfolio of undervalued Australian small-cap stocks, with a focus on companies with strong growth potential.
• WAM Leaders ($WLE): A portfolio of large-cap Australian stocks, with a focus on companies with strong growth potential and attractive valuations.
• Whitefield Limited ($WHF): A portfolio of blue-chip Australian stocks, with a focus on companies with strong dividend yields.
• Argo Global Listed Infrastructure ($ALI): A portfolio of globally listed infrastructure assets, including toll roads, airports, and utilities.
• Magellan Global Trust ($MGG): A portfolio of global equities managed by Magellan Asset Management, with a focus on high-quality companies with sustainable competitive advantages.

💡Related: Real Estate Investment Trusts: What are REITs?→

💡Related: Top 10 Dividend ETFs in Australia→

ETFs and LICs FAQs

What are the tax implications of ETFs and LICs?

The tax implications of ETFs and LICs for Australian investors are generally similar to those of investing in individual stocks. Here are some key points to consider:

• Capital gains tax (CGT) may apply when selling shares in an ETF or LIC for a profit. The CGT discount of 50% applies if the shares are held for at least 12 months.
• Dividend income received from Australian shares held by ETFs and LICs may be eligible for franking credits, which can offset the investor's tax liability.
• Both investment products may distribute capital gains, which are taxed at the investor's marginal tax rate.
• Foreign income received from overseas investments held by ETFs and LICs may be subject to withholding tax, depending on the country of origin and any tax treaties in place.

What is the largest ETF in Australia?

The largest exchange-traded fund (ETF) in Australia by market capitalisation is the Vanguard Australian Shares Index ETF ($VAS), with a market cap of $12.11b as of 6 May 2023. It tracks the performance of the ASX 300, which represents the largest 300 companies on the Australian Securities Exchange (ASX). VAS is a low-cost ETF with a management fee of 0.10% per annum, making it a popular choice for many Australian investors seeking exposure to the Australian share market. Since its inception in May 2009, it has returned +8.88% to its investors (as of 31 March 2023). VAS was also the most traded ETF on the Stake platform in 2022 as seen in the Stockest 100.

What is the largest LIC in Australia?

The largest listed investment company (LIC) in Australia by market capitalisation is the Australian Foundation Investment Company ($AFI). As of 5 April 2023, AFI has a market capitalisation of approximately $9.4b. It has a diversified portfolio of Australian and international shares and has a long track record of paying fully franked dividends to its shareholders. From April 2018 to April 2023, it returned +23.5%.

This does not constitute financial product advice nor a recommendation to invest in the securities listed. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking appropriate financial or taxation advice before investing.