LICs v. ETPs: Know the differences! | BetaShares

LICs v. ETPs: Know the differences!

BY David Bassanese | 17 December 2014
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With strong growth in the number of self-managed super fund and other self-directed investors wanting to make their own investments, the popularity of ASX-traded investments – such as exchange traded products (ETPs) and listed investment companies (LICs) is clearly on the rise.

As at end November, there were 64 LICs listed on the ASX, with $25.9 billion funds under management (FUM) – a rise of 12.1% over the past year. By contrast, there were 98 ETPs on the market, with FUM of over $14 billion – with very fast growth of 45.5% over the past year.

But while both LICs and ETPs are growing in popularity – and may appear at first glance to offer similar investment opportunities – investors should note the popularity of some LICs can come at a considerable value disadvantage compared to that of ETPs.

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Specifically, LICs are “closed-ended” investments, meaning that the supply of units available on the market is fixed without a further capital raising. In turn, that means LIC market prices can often deviate notably from their net-asset value, or “NAV”. As at November, for example, there were a handful of LICs trading at discounts to NAV of more than 20%, meaning that holders would not be able to sell at the value of the underlying assets at that time. On the other hand, there were also a number of LICs trading at substantial premiums (of around 20% of more) to their NAV. Such premiums to NAV typically open up when a LIC has become popular with investors and this demand pushes market prices above the LIC’s NAV. But LIC investors may pay a price for this popularity: buying at such premiums mean that investors are exposed to the potential for prices to subsequently fall back towards NAV if demand softens. More generally, the tendency of LICS to trade at premiums/discounts means that investors face a complex task when attempting to determine an appropriate exit/entry price for their investment.

ETPs, by contrast, are “open-ended” investments, meaning institutional investors (known as “market makers”) are able to vary the supply of units available on the market to match investor demand. This facility gives rise to arbitrage opportunities afforded to market makers, that effectively ensures ETP market prices tend to trade quite closely to their NAV.  For more detailed information on how this process works, please see our technical note[1] in the BetaShares Academy.

Irrespective of the popularity of ETPs, therefore, investors can be relatively confident that bid and offer prices available through the ASX will be reasonably close to the ETP’s NAV. To be sure, investors are typically able to check an ETP’s intraday indicative NAV though either an ETP provider’s website or via the ASX. The same can’t be said for LICs, as updated NAV’s are typically only made available to investors at the end of each month.

At present, it is noteworthy that many of the more popular LICs trading at substantial premiums to their NAV offer attractive dividend yields, suggesting investors –  such as SMSFs – are currently particularly enamored with income returns.  In this regard, investors should realise there are a number of ETPs also on offer providing opportunity for high income- that are built in a way that seeks to avoid the problem of market prices trading at substantial premiums to NAV.

Indeed, as seen in the table below, BetaShares has two ETPs that specifically aim to provide investors attractive income returns from the Australian equity market.

The Equity Yield Maximiser managed fund (ASX:YMAX), for example, aims to provide investors with exposure to a portfolio of 20 blue-chip Australian shares (as represented in the S&P/ASX 20 Index), while providing, though an equity income strategy using options, an attractive quarterly income that exceeds the dividend yield of a portfolio of the underlying shares.

The Australian Dividend Harvester managed fund (ASX: HVST), provides exposure to large-cap Australian shares, along with potential for franked income, that is at least double the yield of the Australian broad share market on an annual basis. The fund also includes a risk management overlay that seeks to cushion downside risk.

Our financials sector ETF (ASX Code: QFN), also offers a potential high income return courtesy of its banking exposure. And for those seeking US equity market exposure, our S&P 500 Yield Maximiser managed fund (ASX Code: UMAX) provides exposure to stocks comprising the S&P 500 Index, with an equity income strategy using options, to provide regular income that aims to exceed the dividend yield of the stocks alone.

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Yield figures calculated by summing the prior 12 month net (excluding franking credits) and gross (including franking credits) fund per unit distributions divided by the fund closing NAV per unit. Other costs may apply, please refer to the PDS for more information.  Past performance is not a reliable indication of future performance.

6 Comments

  1. Does HVST have a DRP in place thanks.
    James

    1. BetaShares  |  December 17, 2014

      Hi James,
      Yes, there is indeed a DRP in place for our HVST fund

  2. Patrick  |  December 17, 2014

    Most LIC’s have an implicit MER of 0.25% or lower. If I buy at 120% of NAV comparative MER is 0.30% but additional cost is capitalised and can be realised as a catastrophic lump sum cost on sale in unfortunate circumstances but never be realised at all. This must be compared to buying ETF at NAV (as calculated by manager not the market) but paying MER up to 0.90%. Even QFN is MER heavy at 0.39%!!

    1. BetaShares  |  December 18, 2014

      Patrick,
      Thanks for your comment. We can’t quite follow the LIC MER analysis but happy to discuss if you’re keen to. Feel free to give our Client Services team a call 1300 487 577.

  3. arthur  |  December 17, 2014

    Has Betashares a fund offering exposure to . australian shares trading in US to take advantage of both franking as well as currancy advantage to australian holders

    1. BetaShares  |  December 18, 2014

      Hi Arthur,
      We replied to your comment on another posting – please check out the comments in this post

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