New to Investing - ETF or LIC?

Hi all,

I am very new to investing and just getting started. I have $5K to start investing with and i was looking at either investing in Vanguard Australian Shares ETF or iShares Core S&P/ASX 200 ETF. I have a few questions for those experienced investors out there.

• Given i am investing a small amount, should i just choose one ETF and invest the whole $5K or should i split it between two different ETF's?
• I am struggling to understand the difference between an ETF and LIC in layman's terms. I don't come from a finance background so the websites i have read have still left me baffled. Are there any major advantages/disadvantages over each other?
• With ETF's i have read it is harder to re-invest dividends automatically. Is this true or false?
• I have also read that not all ETF's pay a dividend. If this is true how can i avoid investing in companies that don't pay a dividend?

Thanks for your help.

 

welcome to InvestChat ,

this website might help a little

ETF Watch - A guide to ETFs & LICs in Australia
2017 ETF & LIC Performance Report

i hold a variety of LICs and ETFs , each have their own strengths and weaknesses

i hold VAS and VHY ( they were at good prices in 2011 ) but iShares might be currently a better deal ( i hold IHD of the iShares products )

past performance is NOT a reliable guide to the future , but it is a guide

accessing the DRP is often an issue with the share registry ( not the ETF or LIC itself ) some registries just make life difficult especially if they use snail mail to deliver security codes to access your holdings ( and the becomes an Australia Post complication )

( some LICs and ETFs do NOT have a DRP you will just have to check each one )

VAS , VHY and IHD DO have a plan .

some ETFs don't ( or rarely ) pay divs , but some LICs have not paid a dividend yet either ( usually the smaller and newer ones , but you need to research that for yourself )

an extra note some LICs ( not all ) do a thing called 'dividend smoothing ' ( holding back some of a dividend in the good years to help make up for the poorer years )

both LICs and ETFs collect the divs from the underlying companies , and package it up to pay you a div ... think of them as a office clerk handling your incoming payments .

both LICs and ETFs can only pay what they have already received ( in the past ) less fees and charges .( if they do something else it is called a Ponzi scheme and can rarely succeed for long )

if not good with financial terms and concepts LEARN ( especially with ETFs where tiny details can make a BIG difference to your returns .)

Investing - Home | Investopedia

this is US web-site some things are a little different be as good a place as any to start learning

and you NEED to learn , ( to help you stop falling into the hands of the few 'rotten apple 'advisors/salesmen that creep into any financial industry )

there are plenty of good ones , but the bad ones can do horrendous damage .

differences .....

each ETF is subtly unique take the 'smart beta ' ones i hold

IHD , SYI , VHY , HVST , despite being computer selected to provide a high dividend return ( from the same ASX top 200 stocks ) the results ( and holdings ) are very different , sometimes one has a windfall the others miss

and LICs can be the same , and extra bonus with LICs is some managers realize their fund is struggling to meet targets and will change/adapt strategies ( this can be a good or a bad thing )

not one style or strategy is perfect all the time , each will have good times and stressful times

this web-site may be useful as well

Listed Investment Company (LIC) updates - Cuffelinks

sorry to make it look hard but the reality is .. research and extra thought ( to what you want to achieve ) can make a BIG difference to your outcome ( even at $5000 level )

PS find a reliable battery calculator , simple calculations can cut through a lot of inferior options .

 

Up to you, brokerage will represent a larger expense when splitting it up.

Vanguard Australian Shares ETF (VAS) and iShares Core S&P/ASX 200 ETF (IOZ) are so similar it won't be worth splitting over both. If you decided to use a second ETF for an international exposure (such as Vanguard International Shares Index Fund (VGS) or iShares Core MSCI World All Cap ETF (IWLD)) it may be worthwhile.

The major difference is the "structure" used. ETFs must pay out all earnings where as LICs can hold back earnings to reinvest or smooth dividends. Effectively either (with some tax considerations) can only give the returns of the underlying investments which relies on the strategy. ETFs tend to be run strategies based on formulas where as LICs by investment managers.

False, ETFs (like LICs) can offer dividend reinvestment plans (DRPs). All ETFs I invest in offer DRP.

Correct, not all ETFs (or LICs) pay dividends. They pay a dividend equivalent to the underlying investments less fees as ETFs distribute all earnings.

If you want to keep things simple and avoid pit falls for your first investments look at;

Index ETFs that are domiciled in Australia (all the ones you and I have mentioned tick these boxes)
The three largest LICs,
Australian Foundation Investment company (AFI)
Argo Investments (ARG)
Milton (MLT)

Smart Beta ETFs and many LICs can all have pitfalls so they are best avoided until you can understand the risks. The majority of these products will (almost certainly) under-perform over a 10 year+ timeframe.

 

SLF and IEM did not have a DRP when i was investing in them , one reason ( but not the only reason ) i decided to exit them ( that may have changed in the last 2 years )

currently most of the ETFs i hold do ( except BEAR , BBOZ and BBUS ) and neither do the PM ETFs ( actually ETPs ) ( PM = precious metals , or physical markets like oil gold , silver , etc )

MVB , might not but for personal reasons i choose to have this cash divs only ( so didn't look very hard at that angle )

 

I really appreciate the advice all. I have a much clearer idea of the differences now and what to look out for. Do you think for a new investor like me, i would get benefit from a subscription like The Barefoot Blueprint?

Would i also be right in saying that an ETF tracks and index, and LIC's are typically free to invest in whatever they wan't and don't need to track an index?

 

gee !!

free advice v. paid advice , that can be a long debate ( with good and bad arguments on both sides )

i don't follow any particular investment blueprint , i try to listen to all , think about what is said ( or printed ) and then try to see if a can find the best path for me .

i am guessing you are young ( under 45 ) you do have time to learn ( quite a bit if you are lucky )

$5,000 long term ( 10 years, plus ) doesn't seem a lot but it could be with a little luck and some good decisions

if you subscribe to the Barefoot Blueprint will you follow it precisely , or adapt it to best suit you ?? ( i don't need to know , but you need to ask yourself that question )


Warren Buffett Quotes (Author of The Essays of Warren Buffett)

i will let Warren Buffet give you some guidelines ( i don't follow them all , but they are a brilliant starting point for your adventure )

 

Thank you. The paid advice is mainly just to point me in the right direction. I don't see myself following a Blueprint to the letter. As for my age, i am 32 turning 33 this year. The $5K is my initial investment and then i plan on putting in $5K every 3 months thereafter hopefully until i retire in 30-35 years.

 

one flaw i see straight up is the hope to retire about 65-67 ( unless you can completely self-fund it )

i am approaching 65 ( in 2020 ) and it is possible by then the male pension age will be 67 ,

given government deficits ( and unwillingness to embrace fiscal responsibility ) i expect

1. governments to tax superannuation heavier ( except for politicians and senior government officials )

2 shift retirement age later ( someone has already suggested 76 ).

since you are planning regular additional funds ( not counting the accumulation via DRP )

could i suggest each new cash injection be a carefully thought out thing ( not an automatic splash of cash into your favorite investment , even if it is currently winning big ) somewhere there will be a nice little bargain .

have goals and plans , for sure , but stay flexible and sensible , if the markets are super crazy and high, keep that money in the bank to add to the next batch ( or until a bargain comes by ).

'right direction ' that is always a tough one , sometimes a direction that looks like a total blunder is a correct one ( several family examples of that ) and the reverse .


A typical dictionary definition of intelligence is “the capacity to acquire and apply knowledge.” Intelligence includes the ability to benefit from past experience, act purposefully, solve problems, and adapt to new situations. Intelligence can also be defined as “the ability that intelligence tests measure.” There is a long history of disagreement about what actually constitutes intelligence.

this was a key discovery in my youth , i learned from everyone i could ( including which really dumb things that will get you killed or crippled )

or

It is necessary for us to learn from others' mistakes. You will not live long enough to make them all yourself.
-Admiral Hyman Rickover

if you think the subscription will be helpful why not ( try to balance out cost v. benefit , first though )

 

Hi twisted strategies. Retirement age is only a guesstimate. Who knows which path life will take me down. Regarding buying bargains, is there really a good and bad time to invest in an ETF or LIC? Given i will be holding these long term 20+ years is it necessary to watch the market closely which seems to go against one of the benefits of not having to pick stocks yourself.

I don't plan on picking individual stocks, but purely by continually investing into ETF's and LIC's.

 

but .. but if you don't understand individual stocks , how will you decide which basket to pick ( portfolio in an ETF or LIC )

the flaw of index funds ( well most of them ) is they select every stock , in say , the ASX 200 which will include say 5 future duds ( you might already see them failing )

the top 200 is simply calculated on Market Cap ( number of shares x $value of the share ) not quality , div. yield , not even on how little debt they hold ... yes are buying the top 200 most popular stocks , hoping the consensus of fools have got it mostly right .

LICs are a little better but you pay a little extra .. the manager picks the better stocks ( in his opinion ) , and tries to buy them at better times ( not just at the end/beginning of the month )

if all stocks are the same ( to you ) which basket do you pick , and why ???

sometimes paying a little extra is worth it in the long run

in 2011 , ( when starting out ) i picked several stocks THEN bought VAS ( as an insurance in case i selected badly ) and later that year i bought VHY and early 2012 QFN ( which was timed nicely but since 2012 the index was changed composition , not totally a bad thing but it wandered away from the plan so in 2017 i bought into MVB to get closer to the plan i may yet divest QFN but haven't decided yet .. maybe if the rally continues ... )

and the same with LICs they look the same but in fact can yield very different results

and in say 20 years time those differences can be huge

knowing individual stocks , and which ETF or LIC is heavily exposed can create very special opportunities take CDM ( which was at the time heavily in MQG ) MQG started kicking out big divs but the CDM share price was going down , i had a very nice time adding extra CDM cheap , and getting a higher div later .. for a while .

 

I don't think what you describe to be a flaw in an index fund is actually a flaw. That's simply what an Index fund is, and why it was developed is it not? You've simply described a fund that tracks a particular index aka an Index fund. Whilst i respect your opinion here twisted, I must say i disagree that you need to monitor individual stocks in order to have success with an ETF or LIC.

In the quotes you just sent me, Warren Buffet concluded that he would ask his wife to invest in a low cost Index Fund, and i don't think he expects her to sit around reading financial reports

The reality is, i'm going for long term growth here. I'm not looking for quick wins or to take excessive risks thinking i can beat the market. An ETF with solid diversification and solid companies in the long run is going to make money from what i've read. Mum and Dad investors rarely beat the market. Heck even the pro's over the long run rarely beat the market index, and i'm sure you have read those studies as well. So based on all of that, i'm certainly not going to be sitting around monitoring the market on a daily basis on top of my day job, hence why i decide to invest in ETF's and take the value investing approach.

I personally don't think you can go wrong with a solid, low cost ETF like VAS or iShares, especially over a 3 year period. I guess we'll just have to see how i go and agree to disagree here.

 

**** Regarding buying bargains, is there really a good and bad time to invest in an ETF or LIC? **

timing is almost an art ( like music , you can play the same note time and time again , but the timing between the notes makes all the difference )



ETFs do not normally drop much ex. div (the market makers keep the SP close the Net Tangible Asset value ) BUT sometimes the index ( and ETF ) will dip about a week BEFORE going ex-div. , sadly not often enough to make a plan around , but maybe once a year ... opportunity arrives .

now LICs ( which is why i prefer them over ETFs ) have some interesting quirks , they NORMALLY drop going ex. div ( and if a 3 monthly payer ) quite likely to set you up nicely for next div.

LICs do not always follow the NTA closely but those that smooth divs can be valued on approximate div. yield ( while the market take notice of NTA and the SP of individual stocks in the basket

a generic 'when the market goes down , isn't really good enough , you really need to have a short-list of targets ready for the major dips ( things to look at first )

say our market crashed ( XJO goes less than 4500 ) VLC and ILC are the first ones i would check the prices of next would be MVW and MNRS , then onto some LICs .. MAYBE MLT , BKI , definitely CDM , and BHD , stuff the market will punish because of fear

please note i will LOOK at these , and MAYBE buy some , i could easily spot a better deal elsewhere .. say PAF or TGG

remember if this investing was easy there would be very few professional fund managers

cheers

 

The book has the basis for a solid financial foundation. The paid subscription (which I haven't used) I believe offers stock tips, do you want to head in that direction? What else are you hoping to get out of it?

Staying the course is the hardest part, if the above helps value might be there.

No. Index ETFs track an index, however there are a range of Smart Beta and other ETFs that are free to do any number of things. They might have a synthetic index or have a value based or dividend focused methodology, others strip dividends.

LICs usually have a mandate that will state what they are trying to achieve and invest in. They might offer a benchmark they are trying to outperform, ie if they invest in asx300 companies then they will try and outperform that index long term.

Yes, unfortunately it is only obvious in hindsight. There are hundreds of predictions every year and some are bound to be right, so how do you know if anyone really knew what was coming?
Easy to convince oneself we can predict these things, especially if we have a few early wins.

Sounds like you are dollar cost averaging (DCA) into the index, a proven way to create wealth long term.

A bit different to value investing.

 

That's the point of a broad low cost index. An understanding and stock picking isn't required.

Not sure about it been a flaw. The collective knowledge of the market has priced stocks based on all the available information. Most people don't (and most can't) have the ability to consistently analyse the information in a better way than the market as a whole making the index a better choice.

You're ability to pick the duds and avoid them is rare

 

****but .. but if you don't understand individual stocks , how will you decide which basket to pick ( portfolio in an ETF or LIC )

That's the point of a broad low cost index. An understanding and stock picking isn't required. ***

and THAT is my main gripe about ETFs and their salesmen

if you join a co-op to buy a car , do you suddenly need no knowledge about the car you are investing , if all the part owners are clueless , how safe are you
certainly no safer than buying the same car alone by yourself if it wrecks while you are in it you are just as dead .

sorry i am a hard core skeptic , the simpler it is supposed to be ( as asserted by the salesman ) the deeper i look for traps

yes i do hold ETFs and LICs but i put about a week of research and thought into each before buying in ( or deciding not to )

i missed the GFC and the 'plantation scandals ' , but i know the game used .. i avoided Aloe Vera and Jojoba schemes ... only a few of the toughest investors ever got some money back from them .

you can't expect a fund manager to be perfect ( just hopefully more skilled than you ) and the same with the computer algorithms behind the ETFs computers create errors as well ( and often have no experience to draw from )

however overnight the US has had a big dip ( well bigger than normal recently )

lets see how the ETF computers handle the market reaction on Monday

don't worry i have my duds the scary part is the duds i have were once market darlings like ARI/OST and SGH . etc. , if they were over-hyped penny dreadfuls i would concede i had that lesson coming

but i have also had almost miraculous luck elsewhere that has exceeded those losing stocks ( i would love to call it skill , but it wasn't ( except MQG in which i could see 50% growth back in 2011 .. it just ran a bit harder than expected )

so since 2011 i can only really claim to have ( deliberately ) picked one winner the rest just exceeded ( or failed to meet ) expectations ( or did what i needed them do ... pay regular divs )

i prefer 'sector plays ' ( a thing ETFs can be quite useful in )

in 2011 i could see a trend in property so bought SLF AS WELL as starting to cherry-pick REITs ... SLF failed to do enough for me ( but i did sell at a profit ) and i still hold several REITs ( i love the niche players in this sector , but not without research )

sorry i haven't confused outrageous luck and skill , if i have any real skill , it is the instinct to grab opportunities very quickly ( mostly without nasty knife-cuts ... except DSH and SGH , so far )

 

mercthunder ,

there is plenty of 'noise' being generated by the overnight dip in the US

if you are set up to buy how would a buy order of VAS @ $74.80 look to you ( possible but not a certain buying price ) ??

this could plummet much lower , ( or not reach that price )

take care

but it could be some practice in placing orders ( and changing them )

VAS is used as an example as i hold VAS and have some research done there , other peers might be better value for you .

look for the last traded price minus say 4% ( or a little lower )

( DYOR )

 

I would say the main difference is the frame of the funds.