Russell endorses ETFs over LICs

Exchange traded funds (ETFs) may be a better option than listed investment companies (LICs) for investors looking to go it alone by using managed investment vehicles, according to Russell Investments.

Russell recently listed an ETF, which director of ETF product development Amanda Skelly asserted provided an alternative for those investors seeking higher dividends through LICs.

Skelly noted that LICs were still twice as popular as ETFs in terms of volume traded, despite the recent jump in ETF trading, and asserted that there were certain areas of concern around LICs that investors should research.

“Anyone investing in LICs or ETFs should think about the options carefully - for some ETFs could be more appropriate,” she said.

Russell stated that most LICs trade at a discount or premium to their net tangible assets (NTA), noting that around 80 per cent of Australian LICs are trading at an average pre-tax discount of 13.35 per cent, up from 8.72 per cent three years ago. It noted that while this may provide opportunities for investors, there might be a reason why they are trading at a discount and those discounts could worsen.

“Any investment in a LIC should be for the long term and investors should be prepared to ride out periods where the LIC is trading at a discount,” said Skelly.

On the other hand, Russell stated that most Australia-based ETFs traded within 1 per cent of NTA, as they were structured so that supply and demand imbalances that led to significant variations from NTA could be corrected. Russell also noted that ETFs offered full transparency to their holdings, publishing the full list of holdings every day, while most LICs published the top 20 to 25 holdings and NTA on a monthly basis.

Another concern that investors looking to buy into a new LIC float should look out for was independence and the makeup of the board, as some tended to have a number of directors in common with fund managers, Skelly said.