LIC & LIT Why LICs over ETFs?

Hi,

I am new here please don't crush me! I am planning to make my first ever investment purchase in the next month.. I am deciding between ETF or LICs.

I created a "mock portfolio" using Sharesight over 5 year period with same investment + regular contribution values. VAS performed better than AFIC:

• ETF: VAS 9% total growth
• LIC: AFIC 4.5% total growth

I'm looking at the numbers and wondering why LICs could be preferred over ETFs?

I read an advantage of LICs are they could do investors better in "bad times" by still paying dividends. I can't help but feel that I would like to have all dividends paid in full now (as ETFs trust structure does) so it can be reinvested in the market asap.

I know there are strong LIC investors here so I am hoping to gain your insight on why you invest via LICs. Any thoughts / comments are appreciated and check out the poll to vote!

Thanks,
Jello

 

Albeit I’m a LIC fan but also invest in ETFs if asked nowadays what to invest in first I’d likely suggest a simple cap weighted ETF such as VAS. Why? Because of the unique characteristics of LICs especially the NTA premium / discount issue, for newer investors it can lead to confustuon then perhaps trying to optimise. The added bonus for me is I don’t have to explain it for the thousandth time.

An ETF such as VAS is simple and marked to market (no NTA issues). That gets the newer investor started on a simple path then if wanting to add LICs to take advantage of their unique characteristics (not necessarily performance) then that’s an option.

 

Jello, maybe add another to the list on your poll as some like myself only invest in the stand alone top50 asx listed and don't invest in any of the above..
BTW",do you have an exit strategy in mind as the words ""invest for the long term are comforting "" but always have a exit strategy as any good gambler never counts their money while they sit at the table ,only after..

 

Good reason to go ETFs.

When you're speaking ETFs I assume you are only taking simple index ones (like VAS).

Don't think you could be reasonably upset with a choice of VAS for your Australian allocation.

Be careful when making historical comparisons as there are many pitfalls that can skew your view.

 

Hi Jello,
Plenty of info available.
If I could suggest you have a written financial plan, I'm very thankful for Nodrog for highlighting this simple advice.

 

From AFI site

 

What is the turnover in for VAS (or STW!) compared with AFI? Does a higher turnover result in Capital Gain or Loss and reflected in distributions? AMIT stuff. Does any LIC Capital Gain offset this despite not necessarily being regular?

What is the effective franking rate with smaller companies being 27.5% and larger 30% - bearing in mind those are on the cards to change? (Mitigates to a degree the potential loss of franking refunds I suppose.)

Opt-in buy backs not undertaken by VAS/STW. Gives the occasional kick to LICs.

No SPPs by VAS/STW which some use to "force" a decision to invest.

All too hard but direct share selection even harder although some get a thrill out of doing it but I don't.

 

I understand the LIC result includes dividend reinvestment. But does it include the discount offered in some of the DRPs? for example, if the DRP has 2-5% discount, the LIC performance would improve if someone keep reinvesting with DRP discount?

Also my view.
1. Assume LICs have higher fees (by 1% management fee) in comparison to ETF. i.e. LIC 1%, ETF 0%.
2. As we know ETF, there is NO discount/premium, hence we must buy at the market price.
3. If one can buy LIC at a discount to the NAV and then keep buying using DRP or SPP with 2-5% discount to NAV...

Would the LIC performance (after admin fee & using the DRP/SPP advantages given in the scenario above) be greater than ETF?
Very often I see articles mentioned that the performance of LIC is lower than their own benchmark (e.g. ETF) by the management fees. However, discount in DRP/SPP is often higher than the management fee. For example: QVE offers 3% DRP discount and management ~1%.

 

The DRP discount is only on the dividend where as the management fee is on the total invested.

 

Fees for old time LIC's are near on the same to the low cost ETF's

 

If one start with a small amount, keeps DRP and SPP when they're available. Would it benefit the investors using LICs path? e.g. start with $500, then max out on DRP and SPP.

Yes, I was using the one of worst case scenarios to show that perhaps, using the LIC feature, like discount from DRP and SPP, may benefit from underperforming index to equal or outperforming the index.

 

Thanks everyone for adding to this discussion. Interesting to see the voting results after 1 week. I can’t talk to anyone I know about this subject so this is great.

@Nodrog thanks for being the first to reply and get this discussion going. Appreciate your honesty. As a beginner I see your logic that it may be best and simpler to start with an ETF like VAS.

@willair good suggestion regarding the poll. Out of interest, what do you invest in? I (maybe naively) do not have an exit strategy at the moment… To begin I plan to only invest using money I am prepared to lose. I will have a think about this.

@Burgs appreciate your comment! I will look into a written financial plan.

@Hodor yes simple index ETF like VAS. The reassurance is nice & noted on the historical comparisons thank you.

@Redwing I have tried to stay away from company provided information (due to potential bias) and am looking for independent arguments to support their positions hence using mock portfolio (albeit my study was only over 5yrs, I may update it to 10yrs).

@SatayKing I had the same turnover question, I was concerned about capital gains. After watching this video Guide to ETFs | ETF.com (on x1.75 speed, because who’s got time!), although not getting every detail, I am more reassured for now. I watched it all but see table at 18:45.

Final thoughts. I see that some LICs have the benefit of dividend substitute share plan or bonus share plan. Means tax is limited to company rate 30% (good for high income earner) although franking credits are lost. I will be investing via a discretionary trust and distributions will go to low / no tax beneficiaries resulting in refund from franked distributions.

Trading at a discount or premium means there is speculation. I am not quite convinced that the opportunity to purchase at a discount offsets times of purchasing at a premium. It sounds reasonable to pay at or close to the NAV at that point in time.

 

Do I need an exit strategy if my plan is to buy and hold forever? Your poignant statement got me thinking about a time when I might want to draw down, e.g. I want to go on the Aged Pension . Seriously I thought if the time comes I'd hope to be in a low tax environment and would incur minimal CGT.

Am. I missing something?

 

Where do you think DRP and SPP discounts come from?

 

I agree.

I invest across two entities being SMSF and Personal Names.

In personal names there is no legal requirement for us to sell assets so this is where the higher yielding ASX listed funds with high levels of franking credits are held. These will likely never be sold and passed on to our Estate beneficiaries.

In Super there is a legal requirement for an increasing percent of total pension assets to be distributed over time which will likely require assets to be sold. Unless of course there is enough investments outside Super to live off in which case all Super assets can remain in accumulation mode. This is another strategy should Labor abolish franking credit refunds. Simply remain in accumulation mode after retirement so at least 50% of franking credits continue to be utilised. And the assets continue to compound in a low tax environment. See strategy example here:

Labor’s superannuation and related reform proposals

However if in Super pension mode the assets can be sold “tax free” then distributed to the member who has the choice of spending it or reinvesting it outside Super. In the SMSF is where we invest in Global shares (including tax inefficient hedged product), most cash / term deposits and for ASX a trust structure such as ETFs is favoured.

As Super assets are progressively reinvested outside Super much of this will also likely be passed to Beneficiaries with a significant amount going to charities.

Seems like a simple exit (if you can call it that) strategy to me.

 

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I can't tell you what approach is best for you, but the few that only trade in listed asx that I talk too each day have a exit strategy from the start for a day week months buy and sell traders ..

not advice in any way..

The simple rule is never allow a short term trade turn into a long term trade even if it's a 25% winner once you break that rule you go into uncharted water's ..

One only has to look within this site and the key metrics on who invests in what ,some like funds where there seems to be no need to keep monitoring their daily profit and loss then analysing the numbers on a monthly basis that is done for them and the cheques just keep turning up in their account's..

To me that's type of investing is ""boring"",, as I like total control and traveling on the slope of hope and run several portfolios and this week 5 trades on one bank and it may well go lower but the timing is right..BOQ..

I read in a book on Kerry Packer where he made this small statement on a page in the middle of the book..
""Positions taken early in any trend always offer the greatest reward""

not advice in any way..​

 

You still picking on poor defenceless LIC investors.

 

Did you apply this rule to your AMP holding?

 

Already done. With 97% tax-free and, obviously, 3% tax-taxable.

 

Bit confused, please explain further? Saturday mornings are not my brightest of times.