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26 July 2018

Simplifying the Process of Investing in Shares

Guide to Exchange Traded Funds (ETFs) and Listed Investment Companies (LICs)

If you are looking to invest in the share market and want a range of diversified investments that spread your risk, without owning and trading multiple equities, why not look at Exchange Traded Funds and Listed Investment Companies?  The differences & benefits of these two types of investment options are broken down below.

What do these funds do?

Exchange Traded Funds (ETFs) and Listed Investment Companies (LICs) are both assets that are able to be bought and sold on the Australian Securities Exchange (ASX).  Their popularity with investors in recent years has exploded, resulting in over 200 different funds now being available on the ASX.

When you invest in an ETF or LIC you are investing in a portfolio of individual assets. Some funds track an entire share market index; for example, an ETF that tracks the S&P/ASX 200 will hold the top 200 funds listed on the ASX. Other funds hold smaller portfolios of stocks and allow the fund manager to invest based on their discretion. ETFs and LICs do not need to invest in shares, there are now a wide range of ETFs and LICs that invest in cash, bonds, currency, commodities, etc.

Benefits of ETFs & LICs

Many investors are drawn to ETFs & LICs for their ability to provide diversification in their portfolios at a reasonably low cost.  For example, an ASX 200 ETF will provide the investor exposure with around 200 individual shares. The trading and brokerage fees to purchase all of these shares individually would, in most cases, far exceed the cost of the ETF. They also provide access to assets traded outside of the ASX, which can be difficult for individual investors to access. This includes international shares, bonds, currency and commodities.

Due to the investors ability to buy/sell ETFs and LICs on the ASX, all that is required to invest is a brokerage account, with shares able to be bought and sold at any time the exchange is open.  Compared to traditional managed funds, where units must be bought and sold by completing application & redemption forms, as well as the mandatory ID checks on every new fund purchase and minimum investment amounts, ETFs & LICs are much more convenient for many investors.

What are the differences in ETFs & LICs?

Traditionally the biggest difference between ETFs & LICs is that ETFs generally track an index return and do not try to outperform that index. LICs on the other hand may use an index as their benchmark but seek to outperform. This is referred to as passive management and active management.  This difference is not always the case however, and in recent times there has been more of a crossover, with many new ETFs coming on the market that are fully or partially actively managed (these are generally referred to as Exchange Traded Managed Funds to differentiate them from Exchange Traded Funds or ETFs, which must track an index. For our purposes, we call them all ETFs).

The real difference between ETFs and LICs is their legal structures.

An LIC is a company. The impact of this is that the pool of money the fund has access to is close-ended (i.e. additional capital requires a raising of capital), and all profits are reported at the company tax rate (currently 30% in Australia for companies with a turnover above $25 million).  Just like other companies, the managers have discretion over how much, if any, they choose to pay as dividends.

An ETF on the other hand is a trust. This means that there is an open-ended source of funding, like a managed fund, where the pool of money can grow and shrink on a daily basis depending on who buys or redeems their units.  It also means that the fund does not pay tax on their earnings but passes these on to the investor, who pays tax at their marginal tax rate.

For more information or an obligation free consultation to find out if these investments are appropriate for your personal situation, please contact me at TMC Advisory on 0407 505 862 or martin@tmcadvisory.com.au.

Martin Reyment
TMC Advisory

You can also check out TMC Advisory here

Please note: This information is general in nature and should not be construed as personal advice.


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