Episode 9

The Great Debate! Managed Funds vs ETFs vs LICs…what they are, how they work and what’s best to invest in.

The debate!

(it’s not time for a math debate, there will be numbers)

Please do listen to our episode “Pay yourself” first

The choices are: Managed Funds, ETFs, LICs

  • What they are and what they do
  • Features and what works best
  • Who will win?

Disclaimer – Full disclosure, I own all three types. Bought shares first, Managed funds about 6 years ago (tech super longer), ETFs and LICs in past 3 years.

Introducing the contenders:

  1. Managed Fund – more managed funds than shares on ASX. 31 December 2017, the managed funds industry had $3,389.6b funds under management (FUM), not FUN, FUM, fun for managers for fees. But some are worth it.
    • Structure – Unit trust
    • Price– Net tangible assets. All shares in UT are worth $1,000,000. units 1,000,000 = $1 Units
    • Underlying investment
  1. ETF
    • Structured as managed funds, but on the ASX – Unit trusts – Income and FC flow through based on holdings. Dividend may not be FF
    • Price – Supply demand, but – Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA
    • Underlying investment
  1. LIC
    • Structured as company – Income determined by board, FC usually paid (due to tax)
    • Price – Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA
    • Underlying investment – Mostly shares – Different segments – small cap, styles

Company V Trust – one has discretion, one is a flow through – value is the same, vs other company

What are they? – Features

  1. How are they traded and when?
    • End of day – MFs
    • Intermarket – LICs, ETFs
  2. Diversification
    • Index – Lots of shares, top heavy
    • Active – 30-150 shares, select sectors/styles
    • Asset classes – Managed funds allow greater access to alt. investments
  1. Costs
    • MERs – percentage-based cost 1% of $100 = $1
      • passive MFs same as ETFs 0.18%, Active 0.8-1.4% p.a. – LICs/MFs
    • Platform costs – Admin fees %, plus flat, sometimes built into platforms (AMP)
    • Transaction costs – per $1,000, each year
      • Buy sell – 0.2% = $2, 1 year = $24
      • Brokerage – $20 = 2%, 1 year = $240

 

Investment styles

  1. Active
  2. Passive
  3. Target investments
  4. Performance/Volatility

Winners:

  • Managed funds – transaction costs, investment styles, diversification
  • ETFs – MERs, off platform, index diversification
  • LIC – Investment style

Losers

  • Managed funds – MERs, platform costs,
  • ETFs – brokerage
  • LIC – brokerage

In the end:

  1. How much will you invest?
  2. For how long?
  3. What is the end goal?
  4. How risky are you? – Costs and volatility – reduce your performance
  5. How active do you want to be or hands off?

Summary

I like all three – this is what I do…

  1. Managed funds – use for smaller monthly investment – as $100 minimums per fund.
  2. LICs – invest into when dividends come in
  3. ETFs – same as LICs – invest when dividends come in.

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