Both the Vanguard Australian Shares Index ETF (ASX: VAS) and listed investment companies (LICs) can be great investments, but I prefer LICs for my own portfolio.
The VAS ETF makes it easy to invest and get exposure to the overall ASX share market for a very low cost of less than 0.10% per year.
For investors that just want to track the return of the ASX 300 (ASX: XKO), 300 of the biggest the Vanguard Australian Shares Index ETF is an effective option.
However, there are a few reasons why I’d choose LICs over the VAS ETF.
Asset discounts
When someone buys $100 of units of an ETF, they should be buying almost exactly $100 of underlying shares (or other assets). That’s simple and fair.
The share prices of LICs change independently of their underlying asset values. So, it’s possible for LICs to trade at a cheaper price than their asset value. Being able to buy something for less than it’s worth sounds good to me.
Some LICs tell investors each week what their latest weekly net tangible assets (NTA) was, so we regularly get updated what the underlying value is and we can compare it to the share price.
For example, the LIC WCM Global Growth Ltd (ASX: WQG) recently said it had NTA before tax of approximately $2 on 17 January 2025. Compare that to the current share price of $1.72, which is a 14% discount.
Plenty of other LICs are trading at sizeable discounts including the biggest LIC, Australian Foundation Investment Co Ltd (ASX: AFI), which also provides weekly NTA updates. I’d try to buy LICs when they are trading at a discount.
Exposure domination
The VAS ETF is heavily exposed to just two sectors, ASX banks and ASX miners. Within that, the Vanguard fund has very large weightings to five financial institutions and a small number of miners. So, while the Vanguard ASX ETF owns 300 businesses, the VAS ETF’s return is heavily influenced by just a few names. I think LIC portfolios can provide more effective diversification.
Additionally, I’m not expecting the banks or miners to produce strong earnings growth over the next three to five years. Considering share prices normally follow earnings, I’m not expecting big returns from the VAS ETF.
Despite the huge, and surprising, run-up of bank share prices in 2024, the VAS ETF has only returned an average of 8% per year in the past five years. There are a fair few LICs that have performed better than this.
Actively-managed LICs can pick and choose where they invest locally or globally, choosing attractively-priced investments and avoiding/sell the expensive ones.
Some global share LICs are particularly attractive to me because of how they can look at almost any market for individual opportunities.
Income stability
With how LICs are companies, the board of directors have the capability to decide on what level of dividend the business pays.
That allows LICs to pay a consistent, and hopefully growing, dividend during both boom markets and downturns.
For investors that are relying on those dividends to pay for life expenses, having a higher level of income reliability may be appealing. Plus, the NTA discount can mean the dividend yield is even higher than it would be if the LIC share price were trading at the same level as its NTA.
The VAS ETF distribution is largely decided by the dividends paid by the underlying businesses, which can be variable, particularly when it comes to miners. We also saw banks significantly cut their dividends in 2020 due to COVID impacts.
It is possible to sell ETFs for cashflow, but some Aussies may not want the stress of trying to decide when the right time is to sell down a portion of their (ETF) investment, particularly when share prices are down.
