TOL - 24th Nov, 2022
The key differences between LICs, unlisted managed funds and ETFs
It's fair to say there are a lot of similarities between popular investment products like LICs, unlisted managed funds and ETFs. But each have unique characteristics which can make them more or less suited to specific types of investors.
How do you know which is right for you? It helps to break down the similarities and differences between these investment products.
General features
LICs, unlisted managed funds and ETFs have variations in the way they are structured and even how ownership works for investors. For example, while your investment in unlisted managed funds and ETFs means you hold 'units' in a managed pool of investments, your investment in a LIC means you own shares in a company structure.
| LICs | Unlisted Managed Funds | ETFs | |
| Listed on the ASX | Yes | No | Yes |
| Legal entity | Company (sometimes Trust eg REITs) | Trust | Trust |
| Typical investment strategy | Active | Active | Passive |
| Minimum entity size | Set by ASX | Unrestricted | Set by ASX |
| What does an investor own? | Shares | Units | Units |
| Liquidity | Mostly liquid - smaller are less liquid. | Varies | Fully liquid |
Costs
Some types of investment products can require high minimum investments or only be accessible to certain types of investors, like institutions or wholesale investors. Pricing can also vary based on a range of factors.
| LICs | Unlisted Managed Funds | ETFs | |
| Minimum investment | Set by broker. Usually $500 or less. | Varies. Usually $10,000 or more | Set by broker. Usually $500 or less. |
| Pricing | Set by market forces | Based on value of underlying investments +/- transaction costs |
Value of underlying values +/- a margin |
| Management fees | Between ETFs and managed funds. Can include performance fees. |
Higher than LICs and ETFs. Can include performance fees. | Typically lower than LICs and managed funds. Usually doesn't include performance fees. |
| Buy/sell spreads | Difference between sell and bid prices. Variable based on market and liquidity. |
Set by manager | Managed by market markers to be within pre-set limits and approximate to asset values. |
| Transaction costs | Broker costs | Buy/sell spread set by manager | Broker costs |
Tax and income
For certain investors, understanding the tax implications of their investments can be crucial. LICs, ETFs and unlisted managed funds typically don't pay tax on behalf of investors and capital gains tax may be applicable. Where they differ is in the payment of dividends (LICs) compared to distributions (ETFs and unlisted managed funds).
| LICs | Unlisted Managed Funds | ETFs | |
| Investor income | LICs pay dividends which may include franking credits. LITs pay distributions. |
Pay distributions which may include franking and other credits. |
Pay distributions which may include franking and other credits. |
| Income tax | LICs pay tax on income and may attach franking credits. LIT distributions are pre-tax. |
Distribution returns are pre-tax. | Distribution returns are pre-tax. |
| Capital gains tax | Tax paid on capital gains. Franking credits may be attached to dividends. |
Do not pay tax but distribute capital gains to investors who in turn pay tax on it. |
Do not pay tax but distribute capital gains to investors who in turn pay tax on it. |
Considering investing in LICs
LICs can offer a valuable and diverse access point to the market and allow investors access to the skill and expertise of fund managers. If it's an investment product that might be suitable for you, you may want to check out our previous guides.
Education
Why this 100-year-old investment structure still has a role in your portfolio
View
Education
How to buy a LIC at the right price
View
This information is an extract from Affluence Funds Management guide to LICs. You can request a copy via our website.
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Daryl has over 25 years’ experience in finance and investing. He formed Affluence to provide investors with regular income and long-term capital growth by investing with some of the best fund managers available in Australia.
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Daryl has over 25 years’ experience in finance and investing. He formed Affluence to provide investors with regular income and long-term capital growth by investing with some of the best fund managers available in Australia.
Expertise
Daryl has over 25 years’ experience in finance and investing. He formed Affluence to provide investors with regular income and long-term capital growth by investing with some of the best fund managers available in Australia.
Expertise
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