ETFs vs LICs

[Ferret]

I've always been a bit of a fan of LICs and have a substantial holding in AFI and smaller holdings in ARG, DJW, SOL, OPH, and WGB. I'm not sure if the last three are technically LICs, but they behave similarly.

I've recently become interested in ETFs and it has been interesting comparing the general index ETFs with the likes of AFI and ARG.

As you'd expect, the index ETFs return very close to the accumulation index they follow. The slight underperformance would mostly be the MER charged.

What I find interesting is that the AFI and ARG underperformance of the ASX200 accumulation index over 10 years is not insignificant. It's currently around 0.7% - substantially more than their typical MER of 0.16%. You'd hope the active management of the LIC would provide some outperformance over the index, but it hasn't for some time.

My conclusion is that for core market holdings, I should be investing in ETFs, not LICs. The only time I should buy LICs in future would be when they are trading well below their NTA values (as often happens). Furthermore, I should be more of a seller of LICs at times when they are trading well above their NTA values.

 

[monkton]

Interesting post, of course what you choose for your 'core holdings' is up to you.
With the old school LIC's you mentioned, one benefit is dividend smoothing, so if one is retired this can be very important as you pretty well know the income is relatively stable with occasionally a slight increase, whereas with index ETF's they have to pay out all income received, in good years & bad & this is why it's recommended to have a good cash reserve to carry you over in the bad years, if retired and/or income is your thing.
With index ETF's, investors are likely, but not exclusively, looking at a 'total return' basis, ie.income & growth & hopefully,have a healthy cash reserve to avoid having to sell during a downturn if relying on this for income in retirement.
Up to you whether you sell LIC's when trading at a premium to NTA & buy back in at a discount, too hard for me & then there are transaction costs & tax on capital gains.
Anyway, my 2 bob's worth, am sure others will either agree, disagree or have better analysis.
By the way, I invest in both, for better or worse.

 

[Ferret]

Good points, monkton.

 

[Belli]

Both are very good posts making the case for and against ETFs/LICs - or a combination of both.

I regard to @monkton's point about dividend consistency from LICs, have a look at AFI's history here:

Australian Foundation Investment Company Limited (ASX:AFI)

Australian Foundation Investment Company Limited (ASX:AFI) upcoming dividends and dividend history at IntelligentInvestor.com.au

www.intelligentinvestor.com.au

compared with IOZ's

iShares Core S&P/ASX 200 ETF (ASX:IOZ)

iShares Core S&P/ASX 200 ETF (ASX:IOZ) share price, ETF research, charts, announcements, dividends, Exchanged Trade Funds at InvestSMART.com.au

www.investsmart.com.au

 

[monkton]

Both are very good posts making the case for and against ETFs/LICs - or a combination of both.

I regard to @monkton's point about dividend consistency from LICs, have a look at AFI's history here:

Australian Foundation Investment Company Limited (ASX:AFI)

Australian Foundation Investment Company Limited (ASX:AFI) upcoming dividends and dividend history at IntelligentInvestor.com.au

www.intelligentinvestor.com.au

compared with IOZ's

iShares Core S&P/ASX 200 ETF (ASX:IOZ)

iShares Core S&P/ASX 200 ETF (ASX:IOZ) share price, ETF research, charts, announcements, dividends, Exchanged Trade Funds at InvestSMART.com.au

www.investsmart.com.au

Good to see those 2 charts for comparison.

A quick 'back of the envelope' comparison it seems on a total return basis that IOZ could be superior to AFI. Over 20 years the price of AFI almost doubled whereas IOZ up nearly 30% but the overall dividend of IOZ appears superior.

Also current div. for IOZ is 6.12% compared to AFI at below 4%, franking not included.

 

[Belli]

Good to see those 2 charts for comparison.

A quick 'back of the envelope' comparison it seems on a total return basis that IOZ could be superior to AFI. Over 20 years the price of AFI almost doubled whereas IOZ up nearly 30% but the overall dividend of IOZ appears superior.

Also current div. for IOZ is 6.12% compared to AFI at below 4%, franking not included.

I'd be a bit cautious about the yield for IOZ. Remember it would likely include the BHP/Woodside arrangements which was reflected in the June 2022 distribution. I also notice the September quarter 2022 distribution appears to be somewhat high in comparison to previous years. I haven't studied IOZ or other similar ETFs very much as I hold VAS so not really interested on others.

 

[monkton]

I'd be a bit cautious about the yield for IOZ. Remember it would likely include the BHP/Woodside arrangements which was reflected in the June 2022 distribution. I also notice the September quarter 2022 distribution appears to be somewhat high in comparison to previous years. I haven't studied IOZ or other similar ETFs very much as I hold VAS so not really interested on others.

True, same for VAS which is what I hold also.

 

[Ferret]

I made my first foray into ETFs today.

I decided to sell my HBRD for a small tax loss. I bought them when interest rates where next to zero, rather than keep money in the bank. With cash now earning something and hybrids not providing any capital gain, I figured it was time to exit the hybrids,

I've put some of the proceeds into equal positions in A200, VTS and VEU. I figure my direct holdings in Aussie stocks means I need to go overweight in offshore ETFs.

The main reason for choosing these three is their low MERs and reasonable liquidity. I read in another thread that combining VTS (US stocks) and VEU (rest of world ex US) gives a lower MER than holding VGS (world) and I've gone this way because I'm a tight arse.

I'm a little concerned that VTS and VEU are close to all time highs and there are plenty of risks ahead for global markets. For this reason, I've held back some of the funds from the HBRD sale and I plan to dollar cost average into the three ETFs over the next few months. I've never used the DCA strategy before, but it seems appropriate here.

 

[Gretsch]

I've got a bad feeling there ain't gonna be much divs paid this month from anyone, with the exception of LIC's

 

[Dona Ferentes]

I've got a bad feeling there ain't gonna be much divs paid this month from anyone, with the exception of LIC's

When it comes to dividends, it's the regularity amd predictability of LICs that win me over. Plus ff, ... And got this message today:

Hi
We're at the final stage of processing your tax return.
We'll deposit your refund within 3 business days to your nominated account.

Australian Taxation Office

 

[Belli]

When it comes to dividends, it's the regularity amd predictability of LICs that win me over.

Yes, LICs, as companies, can have reserves which may support dividends where necessary wheras ETFs, being a Trust structure, are required to pay out all income. In my personal name, I have a mixture of both LICs and ETFs which I consider have served me well being a retired person. On the occassions where ETFs have made distributions larger than expected, such as VAS ($2.16 pcp v $0.89) & VGS ( $1.12 pcp v $0.58) last FY, apart from making provisions for tax, the additional amounts are reinvested. I guess some people don't and spend it all but if that causes them problems at some point it's their issue not mine. I am callous in that way.

 

[Ferret]

My ETF learning journey continues...

Welcome information for VTS and VEU came in the mail yesterday. The packs didn't include W-BEN8 forms, but there was the site address for a Computershare page for these forms. The page led me through entering my HIN, selecting the share holding I wanted to lodge a W-BEN8 for (Buttons appeared for both VTS and VEU).

I used buttons to answer a few simple questions. At the end of this I could download the pre-filled forms and print off for signature. I then scanned them and emailed them to an email address that was shown by Computershare. All pretty easy and I was thinking doing this every three years won't be much of a chore.

Then poking around elsewhere I came across this :-

https://passiveinvestingaustralia.com/fund-domicile-and-avoidable-us-taxes/

If I'm understanding this correctly, if I die holding VTS, VEU or any US domiciled ETF, 40% of the total value will go to US Treasury as a death tax. This could well catch me, as I may not know of my impending demise, and even if I was able to sell before my death, I would be up for Australian tax on capital gains. This doesn't fit with my strategy of using ETFs to build wealth and then be part of estate planning.

I'm now thinking going with VTS and VEU was a mistake and I should have gone the Australian domiciled IVV or VGS.

As I mentioned previously, I'm DCAing into ETFs, so I will probably switch to IVV or VGS for the next parcels I buy. I don't want the complication of owning too many different ETFs, so I will probably offload the VTS and VEU after I have held them for 12 months, assuming they are showing a capital gain.

This US death tax issue is obviously something that doesn't trouble LIC holdings too.

 

[Belli]

@Ferret you is one wealthy dude with c $11.4m to your name.

Note OZ has a tax treaty with the Good ol' USA.

Side note. One LIC which has an international flavour is DUI with about 20% of its assets of $1.3b. It has both US total market and All world ex-USA among others. Of course it is up to the management to decide whether to continue hold those or change the mix.

Latest NTA report

https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=02685243

 

[Ferret]

Ok, maybe I'm jumping at shadows.

Nevertheless, it's not clear to me whether the $11.4m is US assets ( my VEU and VTS holdings) or my total estate. If it's the latter, with Sydney home prices etc it might be a problem by the time I die if it isn't adjusted.

I'll continue to think about whether I feel more comfortable with an Australian domiciled fund.

 

[Belli]

Ok, maybe I'm jumping at shadows.

Nevertheless, it's not clear to me whether the $11.4m is US assets ( my VEU and VTS holdings) or my total estate. If it's the latter, with Sydney home prices etc it might be a problem by the time I die if it isn't adjusted.

I'll continue to think about whether I feel more comfortable with an Australian domiciled fund.

Just to confuse you even more........

The US Australia Estate Tax Treaty Explained - Asena Advisors

This Asena Advisors article explains the U.S. - Australia estate tax treaty. Learn more about it here.

asenaadvisors.com

Click on the whitepaper link near the bottom of the page so you can have some further light bed-time reading.

 

[Ferret]

Just to confuse you even more........

You're right there, Belli.

Thanks for the link, which I read, but I don't think I'm any wiser!

 

[Belli]

You're right there, Belli.

Thanks for the link, which I read, but I don't think I'm any wiser!

You may not be any wiser but at least you have been informed so I'm happy to help.

Nevertheless, it's not clear to me whether the $11.4m is US assets ( my VEU and VTS holdings) or my total estate. If it's the latter, with Sydney home prices etc it might be a problem by the time I die if it isn't adjusted.

I trust you noticed the exemption level is to be adjusted down in 2026.

 

[Ferret]

I trust you noticed the exemption level is to be adjusted down in 2026.

Yes, noticed this.

It could be significant, and I'm still not clear whether the exemption level is based on the total estate or just the US assets. It makes a big difference.

 

[Belli]

Yes, noticed this.

It could be significant, and I'm still not clear whether the exemption level is based on the total estate or just the US assets. It makes a big difference.

I know where you are coming from. When I came across these as a product to consider for investing, as soon as I encountered the issues you have raised I decided they were not for me. Too much effort to wade through the issues for the comparative returns given the amounts I was prepared to put into them. I adopted the KISS principle which is what I try and apply to all my holdings.

 

[Ferret]

Nearly a month since my first ETF purchases and I bought my second tranche of ETFs yesterday.

I've played it cautious and bought VGS rather than VTS + VEU. As I understand it, some of the higher MER for VGS is offset by tax drag that VEU experiences. I considered BGBL, but it is still very new and VGS is a proven performer. It would be nice if Vanguard lowered their MER on VGS to compete with BGBL's MER, but I don't really expect this to happen.

I didn't buy any more A200. My total stock holdings are still very skewed to Australian stocks, so I will only be adding to A200 slowly.