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News & Commentary
No discount, no premium 05 Nov 09
One of the "big advantages" that Exchange Traded Funds (ETFs) have over listed investment companies (LICs) is that their trading price mirrors the value of the indices they track, emphasises specialist ETF adviser David Bassanese.
"Listed Investment companies often trade at a substantial discount or premium to the market value of the companies they invest in, adding another layer of risk for investors," says Bassanese, principal of PennyWise Investment.
Bassanese is best known as a columnist with The Australian Financial Review.
"ETFs, by contrast [to LICs], are designed to always trade in line with their benchmark index," Bassanese adds. "You know that if the market rises by 20% in a year, your ETF will closely match it."
Each month, the ASX publishes the discounts and premiums of listed investment companies to their net tangible assets (NTAs). Two NTA figures are listed – before and after the calculation of capital gains tax on unrealised capital gains. This list makes interesting reading.
As with many issues concerning investment, views differ among investors and their advisers on the matter of discounts and premiums with LICs. Some investors use the discounts and premiums partly as guide when making investment decisions.
Informed investors should understand the differences between ETFs and LICs – including the fact that LICs often trade at large discounts or premiums to their net tangible assets.
Next: Our ETF commentary will examine some of the other key differences between ETFs and LICs.
