Listed Investment Companies (LICs) and Exchange-Traded Funds (ETFs) are both listed on the ASX and allow investors to hold a diversified portfolio through a single investment. However, they differ significantly in structure, pricing, fees, and management approach. Understanding these differences helps you choose the right vehicle for your investment goals.
What Is a LIC?
A Listed Investment Company (LIC) is a closed-end company listed on the ASX. It holds a portfolio of other assets (typically shares) and is run by a professional investment manager.
Key characteristics:
- Fixed number of shares — closed-end structure
- Shares trade on the ASX at market price (which may differ from net asset value)
- Actively managed — a fund manager selects which shares to hold
- Management fees apply
- Can pay dividends sourced from portfolio income (often fully franked)
Examples of Australian LICs:
- AFIC (Australian Foundation Investment Company) — ASX: AFI
- Argo Investments — ASX: ARG
- Whitefield — ASX: WHF
- Mirrabooka — ASX: MIR
- Platinum Asset Management — ASX: PTM (fund manager, not a LIC itself)
- Future Generation Investment Company — ASX: FGX
What Is an ETF?
An ETF (Exchange-Traded Fund) is an open-ended fund that typically tracks an index. It trades on the ASX like a share.
Key characteristics:
- Open-ended — new units are created/redeemed to meet investor demand
- Trades at (or very close to) net asset value — because market makers keep price and NAV aligned
- Usually passively managed (tracks an index) — low management fees
- Can be actively managed (a small number of Australian ETFs are)
Examples of Australian ETFs:
- VAS — Vanguard Australian Shares Index ETF
- A200 — BetaShares Australia 200 ETF
- VGS — Vanguard MSCI Index International Shares ETF
- DHHF — BetaShares Diversified All Growth ETF
Key Differences: LICs vs ETFs
| Feature | LICs | ETFs |
|---|---|---|
| Structure | Closed-end company | Open-ended trust |
| Pricing | Market price (may differ from NTA) | Tracks NAV closely (market makers) |
| Management | Active (stock selection) | Usually passive (index tracking) |
| Management fees | 0.2–1.0%+ per year | 0.03–0.55% per year typically |
| Discount/premium to NTA | Can trade at discount or premium | Negligible difference from NAV |
| Franking credits | Can accumulate and pass through franking credits | Pass-through of underlying dividends + credits |
| Performance | Varies — some beat market, many do not over long periods | Tracks index return |
| Dividend smoothing | Some LICs smooth dividends using accumulated profit reserves | No smoothing — distributes actual income |
| Buybacks | Some LICs buy back shares when trading at discount | Not directly comparable |
The Discount to NTA Issue
A significant distinction of LICs is that market price can differ from net tangible assets (NTA) per share. If a LIC holds $1.00 of assets per share but trades at $0.90, it trades at a 10% discount to NTA.
This matters because:
- Buying at a discount means you are getting $1.00 of assets for $0.90 — potentially attractive
- But discounts can persist or widen — you may not be able to sell at NTA
- Discounts tend to widen during market stress, when LIC shares fall more than underlying assets
ETFs have no persistent discount/premium issue because market makers create and redeem units to keep price aligned with NAV.
Fees: A Meaningful Long-Term Difference
Over 20–30 year investment horizons, the difference between a 0.07% ETF MER (VAS) and a 0.45% LIC MER compounds significantly:
| $100,000 investment, 7% gross return, 30 years | Final value |
|---|---|
| 0.07% MER (VAS equivalent) | ~$755,000 |
| 0.45% MER (LIC equivalent) | ~$680,000 |
The fee difference of 0.38% per year costs approximately $75,000 over 30 years in this example. This is a key reason index ETFs have grown dramatically in popularity relative to active LICs in Australia.
The Dividend Smoothing Advantage of LICs
LICs can retain portfolio income in profitable years and use this to “smooth” dividends in lean years. Some long-established LICs (AFIC, Argo) have paid consistent or growing fully franked dividends for decades — regardless of annual portfolio income variation.
For income investors who value dividend predictability, this is a genuine advantage over ETFs, which distribute exactly what the underlying holdings earn each year (variable).
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Frequently Asked Questions
Are LICs or ETFs better for long-term investors? There is no single answer. For most long-term investors, low-cost index ETFs (VAS, DHHF) have the advantage of lower fees, NAV-aligned pricing, and no discount risk. However, some established Australian LICs (AFIC, Argo) have long track records of competitive performance and consistent fully franked dividends — making them worth consideration for income-focused investors.
What is the AFIC LIC and is it still popular? Australian Foundation Investment Company (AFIC, ASX: AFI) is Australia’s oldest and largest LIC, established in 1928. It invests primarily in ASX shares and has a long history of fully franked dividends. It is still widely held by Australian investors, particularly those who value dividend smoothing and long-term track records. Its management fee is 0.13% per year — competitive with many ETFs.
Can I buy both LICs and ETFs in the same portfolio? Yes. Many investors hold both — a broad index ETF as a core holding, supplemented with a LIC like AFIC for income stability and dividend smoothing. This hybrid approach is common among Australian investors seeking both market exposure and income reliability.
This article provides general financial information only. Company and fund mentions are for educational context and are not a recommendation to buy or sell. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.