As we come out of lockdowns and get back to investor conferences and presentations ETF’s will be part of the opportunity you may want to take up. This is also a comment to the blog post some time ago by @Navarre (April 2021) which you can find here Direct vs. Portfolio Investment: We Weigh Up The Pros & Cons
ETF, LIC and Managed Funds all operate slightly differently and generally have different fee structures associated with them.
Typically Managed Funds are at the higher fee end. They can move in and out of the market (aka hold cash) and rely on the skill of the manager to get returns. The most important thing to understand what theme they are investing in is, what the fee structure is and how it is applied. Fees can be quite high. Typically there are fees to get in, fees to get out and fees for being in it. If the market goes down and then back up again, how are the fees applied? A managed fund is not a set and forget solution you still have to keep track of the managers performance and those fees. I think my father used to think managed funds were a lot like owning a race horse - everywhere there is another fee. It’s helpful to also know what the managed fund is invested in. Though in a managed fund you are expecting a bit more movement on the portfolio. I have a few Managed Funds in my time - mixed success. I’ve had a bit more success owning the funds manager than being in the fund themselves.
LIC (Listed Investment Companies) are a little bit more stable. They can fly to cash but generally remain long term investors. Brokerage is the fee to get in and out of them as you buy on market and each month at least they tell you what they hold and what the Net Asset Backing Per Share (NTA) is which you can compare to the market price. If the Market price is below NTA then you purchase at a discount, if above you’re paying a premium. Generally the fees are published in the annual report and are generally quite low.
ETF’s are a similar in many ways to LIC’s except they are generally FULLY INVESTED so will more closely follow the market. That is probably the key difference between and ETF and LIC. As an ETF gets more money in its invested straight away. Like an LIC they are more long term investors. One of the great things about ETF’s are you can get an ETF on almost anything, Commodities, markets, themes, combinations within geographic areas, even markets going down. Again holding the manager of the ETF’s is often not a bad strategy either.
What all of these products do is offer instant diversity in what you pick and that is its strength and weakness.
Consider Monopoly. It’s a realestate game but based around probability. At the start of the game Railways and Utilities are quite important as they can provide fast cash. Once all the properties are sold or more specifically once people start to build houses, the rent you receive from a player landing on a property with houses is much greater than landing on railway even if you own all 4 of them. So smart players at some point will dump the railways/utilities get cash and switch their investment into houses. ETF’s, LIC, Managed funds work in the same way…
If you’re starting out or investing in a new market ETF/LIC/MF are great ways to get instant exposure to the market. It’s quick. low cost and instant diversification. But when you start to directly hold shares in that sector or market the value of holding the ETF declines. Say you have an ETF or LIC in a particular market. Look at the top 5-10 holdings. If you also hold say 3 of the top 5 holdings directly, have you just doubled down on what you have already invested in? That is the trap.
Once you start investing directly in companies then you should review your ETF/LIC/Managed Funds to see they are still valid and perhaps its time to start to sell down the ETF etc and keep that diversification valid. There is no hard and fast rule here. How and when you sell down is dependant on many factors including the relative size of the holdings, the total portfolio size and the tax outcome of disposals.
This is where Navexa comes into its own where you can see what percentage your holding and particularly become important when you’re dealing with multiple portfolios (Personal + SMSF) or where you are looking at a family group.
