A Different Way to Play this Market

With the Royal Commission into banking in full swing, the role of financial advice has never been more under the spotlight.

Years ago, the banks bought financial advice businesses to help grow their own businesses. Now it looks as though it is all heading the other way.

Banks are now looking to offload these same businesses. That is, unless they up and leave the banks first.

Against this backdrop, though, is the ever-growing superannuation pie. As of December last year, it stood at $2.6 trillion. Those numbers come straight from industry group, ASFA — the Association of Superannuation Funds of Australia.

It’s a huge number — one that is hard to get your head around. What is equally startling is just how quickly this pie is growing. ASFA state that it grew by just over 10% over the prior year.

Whatever the findings of the Commission — and any disruption that follows — investors will still need to work out where to park their money.

As this pool has grown, so too has the number of financial products on offer. Some, like exchange-traded funds (ETFs), have been around for decades.

Founded in 1975, and perhaps the best known, Vanguard claims over $3 trillion in assets under management worldwide. Over $70 billion of that in Australia.

Originally, ETFs worked around a basic concept. To replicate the performance of an index…like the ASX 200.

Now you can invest in ETFs that are much more diverse. For example, one that writes (sells) call options over a basket of shares. All the while collecting dividends.

There are ETFs that invest in cybersecurity firms, agriculture, oil and other commodities.

It is not just ETFs that have grown. So too has another listed product — listed investment companies (LICs).

LICs aren’t a new concept either. They date back a long time before ETFs arrived on the scene. Perhaps the best known, Australian Foundation Investment Company Ltd [ASX:AFI], is 90 years old and has a market-cap of over $7 billion.

However, AFIC is just one of over 90 LICs listed on the ASX.

What’s the difference?

One of the benefits on ETFs and LICs is that they enable investors to gain access to a sector, index or commodity through a single holding. That means they can enter or exit the market through one transaction.

And if the ETF or LIC hold a broad range of shares, it can lower the concentration risk that can come with a smaller number of holdings. Unless investors have a significant trading account, investing in more than 20 or 30 stocks might be impractical.

First is the costs and time involved to enter and exit dozens of positions. It also means that if they choose, investors can try and time their entry and exit into a market with an LIC or ETF.

If you thought oil was about to bounce, but didn’t know which shares to buy, you could buy an oil ETF directly.

Despite similarities, ETFs and LICs are different. Much of that comes down to their structure. 

An ETF is open-ended. That is, it can add new units to cater for an increase in demand. Their main limit is the liquidity and number of shares in the underlying securities.

An LIC, by comparison, is ‘closed’. Meaning that number of shares on issue is finite. The only way to increase the number is through a capital raising.

Much of the discussion around LICs and ETFs focuses on these difference structures. However, what investors often miss is their different objectives.

Different aims

The aim of an ETF is to match an underlying index. As the number of ETFs has increased, the more obscure some of these indices have become. Sometimes it seems as if the ETF providers create an underlying index solely for the purpose of creating a new ETF.

Note that match is the key word, not ‘beat’. Where that differs from an LIC, though, is that an LIC typically aims to beat an index. If they invest in global shares, it will be a global index like those offered from MSCI (Morgan Stanley Capital International).

And on the local front, it might be the S&P/ASX 200. Or the accumulation index — that is, one that includes the reinvestment of dividends.

But just like private investors, LICs can also struggle to beat the index. That’s why you will see many LICs trading below their net tangible asset (NTA) backing. That is, the value of each share based on the market value of their holdings and cash.

And because they are actively managed, LICs will often charge higher fees than an ETF. Though not always. Fees, along with performance history, are something you should check out before looking to invest.

With volatility continuing in the market, and share prices falling dramatically, should a company release a poor result or trading update, both LICs and ETFs can offer investors a different way to gain exposure to this market.

All the best,

Matt Hibbard,
Editor, Total Income


While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.


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