Understanding Exchange Traded Investments

The Australian Stock Exchange now offers several products that are an alternative to traditional managed funds. They offer an exposure to different asset classes and strategies in a typically liquid, simple and cost effective manner. That is, investors have found the relative price transparency and ability to transact without having to fill in applications forms attractive. In this article, we aim to explain the differences between the types of exchange traded products offered.

Listed Investment Company (LIC): The investor owns shares in the company, which actively manages the investment portfolio that it owns. A fixed number of shares are issued, but additional capital can be raised. The company’s directors determine the extent of distributions to investors. The share price may not reflect the value of the investments held by the LIC (ie Net Asset Value or NAV).

Listed Investment Trust: These have a trust structure with a responsible entity rather than directors. All distributions must flow through to the investor. Like the LIC, the portfolio is actively managed, there are a fixed number of units and the unit price may not reflect the value of the investments held by the trust (NAV).

Exchange Traded Funds: Traditional ETFs are trusts that adopt a passive, low cost investment management strategy that aims to replicate an index (eg ASX 200). They distribute all income to unit holders. However, a “market maker” is appointed by the product issuer to ensure that units can always be bought or sold at a price near to the value of the investments held by the ETF (NAV). An intra-day NAV (iNAV) may be quoted every 15- 30 seconds to show where the ETF is trading relative to its NAV.

Exchange Traded Managed Fund : Also called an “Active EFT”, which differs from a traditional passive ETF in that the portfolio is actively managed and the fund manager acts as a “market maker” to provide liquidity and to ensure that the price trades around the NAV.

mFunds : These are unit trusts which are actively managed, however the units do not trade on the ASX. Instead, units can be purchased or sold via a broker and settled with the fund manager who issues and redeems the units which are valued daily.

Some Considerations
This technical article is of a general nature only and should not be construed as financial advice or as a basis for making any financial investment or other decision.
A qualified TFLG Financial Adviser may be able to assist you in selecting the appropriate investments given your personal circumstances, time frame, risk profile and objectives.

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