# Index ETFs (STW) vs. LICs



## osmosis (14 April 2008)

Hi
I wonder if someone will enlighten me on two issues:

1. Would it be fair to say that there should not really be any difference in the long term growth/SP (in % terms) of an index ETF such as STW  and that of a large LIC which invests in ASX 200 companies such as ARG or AFI.

2. Is there any difference, from a tax perspective, of the dividends from an LIC versus the distributions from STW. Which is more tax efficient? I suspect it is the LIC's but I may be wrong.

Thanks.


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## Blue Monday (14 April 2008)

*Re: Index ETF's (STW) vs LIC's*

1. In the long-term, probably not much of a difference. Personally I prefer the ETF because I know exactly what I'm getting in the portfolio.

2. Tax is a bit different for those LICs and the ETF. Both those LICs pay fully franked dividends. STW pays two dividends a year; one is ~25% franked and a smaller one is about ~70% franked. On average you get ~40% franking credits - this is because the fund uses some of the franking credits, but they gross up the dividend to compensate. I expect the dividend yield on the ETF would be larger, although I haven't checked.

Tax is also different for an ETF as you pay capital gains on the purchases and sales within the fund as you hold it, not just when you buy/sell the ETF. I believe they send you a statement at the end of the year outlining your capital gains liabilities. On the other hand in an LIC the CGT is dealt with inside the company, so effectively it comes out of the assets in the fund.

I hope most of that is correct!


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## Judd (15 April 2008)

*Re: Index ETF's (STW) vs LIC's*

Just one matter.  With LIC's they distribute dividends and you include them in the tax year in which they are received.  With EFT, they are actually listed funds and provide distributions which must be included in the tax year when they are accrued.

For example, for the tax year 2007/2008, AFI has paid two dividends on 22/8/2007 and 27/2/2008.  These are included in your 2007/2008 tax return.

STW (an EFT) has paid distributions on 4/7/2007 and 4/1/2008.  The distribution paid on 4/7/2007 is NOT included in the 2007/2008 tax year but has to be declared in the previous tax year, ie 2006/2007.  The fund sends you a taxation statement to assist you in putting the right numbers in the right boxes.


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## osmosis (15 April 2008)

*Re: Index ETF's (STW) vs LIC's*

So why choose an index ETF (STW) over an establiashed LIC or vica versa?


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## reece55 (15 April 2008)

*Re: Index ETF's (STW) vs LIC's*



osmosis said:


> So why choose an index ETF (STW) over an establiashed LIC or vica versa?




Osmosis
One reason may be the CGT discount that LIC's receive (i.e. they can distribute capital profits to eligible investors at a reduced rate). They (specifically say the larger ones, AFIC and Argo) also have very lower MER's ( lower than an ETF by quite a margin...

Out of interest, I have done some stats on the comparison between the XJO index and the two leading LIC's - to be honest, I was surprised that the indexes standard deviation was lower than the LIC's, because I always considered them a safe haven in the bad times. Average annual returns were also higher.... Very interesting stuff... 

Cheers


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## osmosis (18 April 2008)

*Re: Index ETF's (STW) vs LIC's*

Wow, that's an interesting comparison. What time frame did you use for your Total Return calculation? By Expected Return, I take it you mean dividends and if so is that after tax or before?

Does the information suggest that STW is the better long term option?


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## intheblack (18 April 2008)

*Re: Index ETF's (STW) vs LIC's*

Don't forget many of the LICs offer discounted share purchase plans and rights issues, which provide added value that you don't get from STW.  Argo, for example, offers an SPP twice a year at a 2.5% discount to share price, which effectively means that you're 2.5% up on that money already.


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## Judd (18 April 2008)

*Re: Index ETF's (STW) vs LIC's*

Interesting discussion.  Another aspect to bear in mind that most LIC's, especially the older established ones, tend to maintain or even increase dividends on their expanded capital base, ie despite the issue of additional shares under share purchase plans, rights issues or dividend reinvestment plans.


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## awg (28 August 2008)

*Re: Index ETF's (STW) vs LIC's*

Can anyone comment on Liquidity, in respect to daily Volume of trading.

looking at STW, AFI and ARGO, they seem to trade lower volumes than I would like to see for a stock i had a fair bit in ( i dont at the moment).

very curious, whether this might cause excessive SLIPPAGE, if one decided to offload in a sudden market downturn.

if anyone has traded STW in particular, does it track the xjo very closely, in price and volume, or overshoot?

regards tony


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## Blue Monday (28 August 2008)

*Re: Index ETF's (STW) vs LIC's*



awg said:


> Can anyone comment on Liquidity, in respect to daily Volume of trading.
> 
> looking at STW, AFI and ARGO, they seem to trade lower volumes than I would like to see for a stock i had a fair bit in ( i dont at the moment).
> 
> ...




STW has market makers in the stock who keep limit orders either side of the net asset value of the fund. Looking at the screen now, there is 45,000 on either side with a 4c spread... so at current prices you could buy or sell up to $2m instantly at a difference of less than 0.1% against the NAV.

AFI or ARG on the other hand don't have designated market makers like STW and the other ETFs do.


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## Toeknee (23 October 2012)

*Re: Index ETF's (STW) vs LIC's*

Thread revival!

Can anyone add any closing comments to this thread on the taxation implications from investing in either an LIC vs an ETF?

So far in this thread:

LIC = Pays CGT, may get 50% discount. Absorbed within the company, therefore no CG (other than SP appreciation) for investor.

ETF = Does not pay CGT. Any CG in a year passed on to investor? 

Did I read the thread correctly? 

Thank you.


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## The Barbarian Investor (11 October 2014)

When comparing LIC's and Index TRacking ETF's would it be fair to assume that the LIC would be rebalancing throughout the year which over the long term should improve performance, whereas the ETF is just plodding along doing its thing

If you held several ETF's and Re-Balanced when your parameters where reached, you would be doing similar to a LIC and could also outperform the index as LIC's such as AFI do


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## DeepState (11 October 2014)

The Barbarian Investor said:


> When comparing LIC's and Index TRacking ETF's would it be fair to assume that the LIC would be rebalancing throughout the year which over the long term should improve performance, whereas the ETF is just plodding along doing its thing
> 
> If you held several ETF's and Re-Balanced when your parameters where reached, you would be doing similar to a LIC and could also outperform the index as LIC's such as AFI do




There is a difference between systematic rebalancing and more generic active portfolio management, although it can be argued that rebalancing is a form of active portfolio management.  The type of portfolio management that AFI does is dominated by stock selection.  Buy more BHP than the index and perhaps trim or add to it as the market moves around a bit.  Performance is dominated by stock selection and rebalancing tends to be infrequent and occurs only after very big moves in relative prices.

STW is an index fund.  It just tracks the underlying index and doesn't have much else going on.  It does not profit from rebalance activity.

If you elect to systematically rebalance as per some rule, it tends to add value over time.  The chances of beating a static alternative tends to improve with time also.  Hence, if you were to buy a set of sector or factor ETFs and rebalance those, you may be able to generate more returns than the index and AFI.  However, the rebalance process and profitability from this requires a fair number of moving pieces to really benefit from it. If all else is equal, the more diverse the universe of assets being rebalanced, the better.  Although you can make money rebalancing with just 4 ETF assets, say, systematic rebalancing does better when you have 100 in motion.

That said, the way you choose/weight your mix of ETFs will be dominant for portfolio performance against index over shorter periods, but rebalancing profits can be expected (but not guaranteed to) emerge as the more dominant driver in the longer term.



Disclosure: Holder STW and also proponent of systematic rebalancing.


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