LIC & LIT LIC's v ETF's which is better and why

I got my one and only question (so far) answered on IC

 

No such thing. We've all been through this at some stage. And I'm still guilty of such things myself at times.

 

Showing my LIC bias here… Reasons why I prefer LICs over ETFs:

- More stable dividends due to their ability as companies to smooth out their cash
- Able to focus on the longer term due to their closed end structure
- Less volatile share prices due to the above + a NTA cycle that measures in weeks, not minutes
- Able to outperform indexes rather than just tracking them.

 

- 100% franking (for extra cream on top)

 

This is a moot point actually. My understanding is there’s no difference in end result between the two. The article quoted earlier by austing says:

 

There is a school of thought that no-one can beat the index consistently over time. Thus LICs should eventually perform worse than the index to which they compete - ie VAS for AFI, ARG, BKI, MLT, WHF although some of those are resource free.

Anyway, that was what I believed before reading the LIC thread. Now I've read and understood some of it, I realise that the LICs can perform better by cleaning out the crap and using tax advantage where possible not to uncur CGT type events as we saw with VAS.

Now remember, that is only one dividend, so don't get too trigger happy. If you are in this for the long haul which I'm assuming you are given you are investing in VAS in the first place, you need to ignore what's happening in the market unless you are looking for a buy opportunity. BTW You will find that VAS has just gone ex dividend with its highest dividend that I can see which is over 1 dollar.

I have VAS, VGS, VEU and VTS, which made sense to my mathematical mind, but thanks to the kind and intelligent gents that post here, especially @austing @The Falcon @Hodor etc, I also have ARG, MLT, BKI, PMC with plans to get some parcels of WHF and AFI when they are cheaper to take advantage of the SPPs.

Each has an advantage. ETFs can give you a fully diversified global portfolio in a mathematical sense. You get everything, including the rubbish. The LICs choose based on expertise, just like a managed fund except much cheaper and often with better results. It depends on the requirements as to which is better.

Not advice.

 

Rather than choosing one over the other some will take advantage of both. LICs when at a discount, ETFs when the LICs are at a premium.

As an example most of us would want to take advantage of a major market correction to top up our holdings. Unfortunately a number of the older LICs are seen are safe havens and can trade at a premium during uncertain times. Hence rather than not buy their favourite LICs because of the strong premium and miss out on the correction opportunity they will buy an index ETF instead which should be around fair value.

 

Property investing is not really the domain of the trader so I wonder if you could find property investors who are interested in share trading? Personally, I can't get my head around it. I guess I am a kind of extreme holder when it comes to shares. I have bought property and shares. I have sold property but I have never sold a share.

Anyway, back to topic, I raised the issue of ETFs vs LICs in another thread.

The reason I raised this is because I was fairly set on a Boglehead ETF strategy but some questions have been raised about lumpy dividends from Vanguard. I am still not sure what that was about. So I am exploring LICs more. However, many are trading at a premium, so probably not the best time to buy.

Being a long term holder (as in forever), I guess it probably won't make that much difference but I always like to educate myself as to what I am buying before I invest.

So, LICs vs ETFs. Is the answer both?

 

This came out in the Peter Thornhill seminar as well (there's also a risk of underperforming the market well due to the human interference in LICs).

There are some criteria around choosing LICs. Do you have a criteria for selecting ETFs? (I am genuinely asking as I have been following the LIC thread more before confusing myself too much). Providing the ETFs are established and have gone through a number of challenges (GFC, recession etc), @austing 's comment above would be a sustainable approach, without spreading it too thinly.

 

MLT and WHF (my two favs) are both at pre tax discounts from my brief look.

Remember no one knows when the next crash is coming or how long the good times will roll.

I read something to the effect of - Buy when stock is cheap, buy when it is at a fair price and buy when it is a little expensive. I like it, stops me from thinking I might be getting clever.

 

Nice post, got my eyes on MLT and WHF as well as topping up BKI as we speak! If I get too cute and think I'm smarter than the market and all the other participants ie sellers it usually doesn't end well!

I gotta just keep accumulating a future passive dividend income stream!

 

Good advice @Hodor and @pippen

 

To me it comes down to what is 'Below Market Value' to pick a property investment term. If an LIC looks good value in relation to NTA and/or an index, I will buy that. If an ETF and it's related index is at a low value compared to 52-week high I will by that. If a direct stock that meets the income criteria is at low value I'll buy that.

For ETFs specifically I am looking for healthy dividends, ideally combined with a history of capital growth.

Last 12 months as an indicator - ticker dividend growth:

• IOZ 7.25% 13.74%
• VHY 7.76% 12.4%
• SYI 6.36% 16.86%
• SFY 6.3% 13.84%
• MVB 6.74% 11.7%

Don't forget to look at fees.

• IOZ 0.15%
• VHY 0.25%
• SYI 0.35%
• SFY 0.286%
• MVB 0.28%

 

I now hold very few ETFs.

The ability for LICs to smoothen both price and dividend, especially in times of crisis, is too valuable for a retiree like me to overlook.

 

I only look at the plain Vanilla Index ETF's, no Strategic Beta or Exotic ETF's

ETF's aren't that old and neither is the ability to invest in the indices themselves (Bogle created the world’s first index mutual fund in 1975 ) , just look at the underlying index i.e. ASX and you'll have the history of how the underlying shares (the index constituents) having gone through the challenges

Australian Foundation Investment Company has a history dating back to 1928

I like ETF's and LIC's post by @austing

Though I must be an even lazier investor than Austing then, as with the ETF's I don't even have to check NTA I just invest in the laggards

 

There is some interesting reading in the below links

ETF's Vs LIC's

LICs or ETFs – what you need to know

ETFs vs LICs - the tale of the tape

The ABCs of LICs and ETFs

Managed funds, LICs, ETFs or managed accounts: which solution is right for you?

Or this...

Consider also US and International (ex US) ETF's

 

Great links, thanks! My head hurts...

 

Both of these blogs are interesting reads

Strongmoney

LICs vs Index Funds – Which is Better?

AussieFirebug

ETFS VS LICS and Strategy 3 revisited

 

Interesting post from Ben Carlson as is often the case. And the following quote along the lines of what that wise young fella known as @SatayKing is often suggesting:

Forget about ETFs vs LICs and mine is better than yours etc. There’s only one benchmark that matters and that’s your own. The one that gives you the best chance of staying in the game and meeting “your” goals. For some it’s income for others it’s total returns and the very conservative might favour mostly cash / term deposits. There’s any number of choices that will “feel right” for a given investor. Don’t let anyone tell you your choice is inferior!