These days many doctors ask me whether it is better to invest in ETF’s or LICs.
LICs and ETFs are similar in that they allow you to invest in a diverse portfolio of companies in one transaction.
Both investment products are very transparent, as you can clearly identify the underlying investment holdings, and the price is quoted on the stock exchange. This also makes it very easy to trade them.
However there are some key differences that you need to be aware of.
LICs do not aim to track specific share market indices, but rather to outperform them. ETFs usually do track an index. For example, they might track a broad-based market index such as Australia’s S&P/ASX 200 or the S&P 500 in the United States. Or they might track a narrow and specific index such as Healthcare or Real Estate Investment Trusts.
As such, your investment philosophy may determine what product you prefer.
ETFs cover a broader range of asset classes than LICs. For example, there are ETFs that invest specifically in domestic shares, international shares, fixed-income products, foreign currencies, precious metals, commodities and agricultural products.
To build a truly diversified portfolio, you may thus need to use some ETFs at least.
LIC portfolios are constructed using physical stocks (actual shares). So too are ETFs, but not always. Some ETFs (referred to as synthetic ETFs) use derivatives in their portfolios. These simulate the returns that would have been achieved by a portfolio constructed purely from physical securities. The use of derivatives introduces an additional layer of risk. Be mindful of this when you build your portfolio.
ETF management fees are typically lower than LIC management fees, due to their typically passive investment strategy.
ETFs and LICs are not mutually exclusive, but it is also important to note that very few active managers (including LIC managers) outperform the benchmark return (including ETF’s) consistently.
If you wanted to get specific investment advice, please feel free to contact me on 0432 885 295 or Yves@affluenceprivate.com.au.