LICs vs ETFs – which perform best?

Thank you Jan. I hold 7 LICs but no ETFs (outside super and Divs my only income) and have been considering buying one or two. Your point is extremely valid to me! The Divs and franking credit have kept me with a couple for years even tho their “performance” is a bit inferior.

Hi Jan,

Thanks for your comments. You're right - they are different vehicles and are taxed differently, so I could have made that clearer.

It's worth noting that indices like the ASX 200 are calculated before tax and franking. And it's standard practice to compare funds including LICs against indices. I applied that logic to ETFs.

I understand some don't agree with that approach and it's a good discussion to have.

Fully agree with Jan.

Is excluding franking a fair comparison? Maybe it's apples to apples but does not reflect the actual returns an individual might get in a real world scenario from each investment.

This is ridiculous. How can you exclude franking credits in the performance data…? On your logic, the structure of an entity determines its performance…

Example as follows:

There is a LIT or ETF and it makes 10% returns. These 10% returns are paid out to the investor.

There is then a LIC that makes 10% returns. The LIC pays 30% tax on that 10% (3%) to the ATO. It passes through 7% to the investor and provides a franking credit for the 3% returns it’s paid in tax.

Comparing the 10% number for the LIT/ETF to the 7% number for the LIC is just nonsense.

I’m am so tired of the one way narrative on LICs.m, it’s a disservice to investors.

And ETFs can't do the same?

Pretty well all ASX focused ETF's also carry franking credits. VAS for example as one of the biggest has around 80% franking, pretty good and simply reflects some of the companies in the ASX300 don't pay fully franked dividends but capture some of the growing companies. Low growth companies tend to pay more dividends as their own business isn't that flash an investment. If you limit your investment to only companies that are fully franked you can see how that can be a drag on long tern performance.
But I do agree that there is far too much quoting of returns without franking mentioned. It is a real, cash equivalent component and should always be included.

No

The returns from LICs are normally reported without franking included. They certainly are by reputable rating agencies and brokers.

Emma,

In this article, I've used industry standard figures for LIC, indice, and ETF returns.

Yes 100% agree with James and other comments that most Australian etf's are highly franked as well. There is too much vested interest and lack of transparency in the LIC sector, and that is a disservice to investors. If there is a one way narrative it is only reflecting the reality, just look at the chart of FUM in etc vs LIC for past 10 years, it is truly one way.

Hi James, with the concerns raised about not including franking Credits and also the structural difference between a Company and a Trust with regards to the tax implications on an individual investor, could you write an article with a comparison of like for like or as similar as can be, with the after tax and franking credit positions calculated as well as the other metrics, and adjusted into a theoretical invested amount to have a little more clarity? Some kind of total adjusted return inclusive of all factors should clear things up.

More than happy for these posts to come out suppressing the price of LICs while I continue to load up at a discount to NTA in my super fund.

In 30 years time my future self will be thanking me!!!

A lot of aspiring GLI's out there, perhaps some are successful greedy 'lic investors' but also a lot of 'greedy lic' investors who would see better returns in etf's.

There are other aspects to performance than total return. It's not always about the headline numbers.

I'm sure Peter will be along soon to set you all straight. :)

David,

Bollocks - performance is performance. No other way to spin it.

LIC advocates will say, oh but we can smooth out dividends - so what? Either way, underperformance is underperformance.

That's exactly right.

My first ever investment was in AFIC. But when VGS came on the scene, it made it super easy to invest internationally at a cost similar to that of AFIC. Therefore, I got involved. The returns have been sensational and has left my AFIC investment in the dust - even when adding for my 'smoothed out' fully franked dividends.

But hey, if you're someone who's earning over $400k p.a. in dividends from your local and UK LIC investment interests, then why would you be an advocate of ETF's?

LIC's are challenged and like I've noted previously, it's not only individual companies that face disruption.

What a lot of twaddle. I am interested in one thing only and that is income. At almost 80 years of age my wife and I have one focus; to enjoy our selves as best and as long as we can and this requires INCOME.
My benchmark remains my 4 UK LIC's that we inherited as a result of our 18 month working holiday in England after marrying in 1969. By the way, our 18 month holiday became 18 years which was pure gold as far as my financial education was concerned. They each pay quarterly dividends which is 16 dividends into my UK super fund.
One of these gems has just declared its 59th dividend increase.
Don't ask me what the share price has done but you can guess based on the steady cash flow.
By the way, the LIC has been around for over 160 years. You can shove your ETF's.

"At almost 80 years of age my wife and I have one focus; to enjoy our selves as best and as long as we can and this requires INCOME.":

At 80, income is not required unless you have little capital.

Drawdown:

Tax 47%, yield 4.3%, inflation 2.2%, to 100, from 80, present capital $10,000,000, future capital $1,000,000), other income $100,000:
= PMT((1 + (1 - 47%) * 4.3%) / (1 + 2.2%) - 1, (100 - 80), -10000000, 1000000) + 100000
= $554,434 / y

Tax 30%:
= PMT((1 + (1 - 30%) * 4.3%) / (1 + 2.2%) - 1, (100 - 80), -10000000, 1000000) + 100000
= $596,310 / y

Tax 0%, Yield = inflation:
= PMT((1 + (1 - 0%) * 2.2%) / (1 + 2.2%) - 1, (100 - 80), -10000000, 1000000) + 100000
= $550,000 / y

At end of the drawdown, still have capital $1,000,000, income $100,000, and non-yielding assets such as home or royalties.

that may be OK for you , but the vast majority of people also need growth, as they don't have a portfolio
as large as yours !

Don't leave us hanging Pete...what do you really think? ??
I think a very useful exercise...very interesting article, thanks James

"the vast majority of people also need growth, as they don't have a portfolio as large as yours":

For the vast majority a home and Age Pension are enough to be able to save and keep ahead of costs.

Additional capital equal to the Full Age Pension Threshold of $481,500; in the comfort zone.

12% super would more than cover it.

For such a seasoned educator on investment and someone who certainly impacted my approach to investing, this reply is unfortunately a bit sad. I get you crave income, but to call all ETF's effectively twaddle is patently absurd. Defending LIC's just because they cater to your income needs even if you forego capital appreciation is great for you, but not great advice to the broader investment community. (you know you can sell down some assets and produce income? And in pension phase with super there is no capital gains tax before someone arks up about tax). The question that was originally asked is whether ETF's or LIC seem to be a superior option and a simple head to head comparison (of course noting there are many of each so there is no simple black and white answer). The ETF's seem to be supporting Jack Bogles view that an index fund should on average beat a managed fund (which all LIC's are), and I suspect most Firstlinks readers are eminently aware of the abysmal record of managed funds versus index funds (which are the basis of the original ETF's). I love income too, I have bills to pay and holidays to plan, but am not yet 80 and need the base capital to grow so that my income in 20 years time has kept up with inflation. It's called balance. And sorry Peter, you can shove your dinosaur LIC's. You actually presented an example in a presentation I attended where you showed the superiority of investing in a lower dividend paying company with high growth versus a higher dividend but lower growth company when comparing I recall Westfield malls versus the operational company that the Lowies used to run the malls (I may have the specifics wrong but the message is I believe correct). Would not the same logic support owning (slightly) lower dividend paying ETF's versus higher paying LIC's if the overall return is greater? So given the banks have no growth, the miners are about so see a wall of African iron ore, Tesltra is a dog, the supermarkets are treading water - where are the LIC's going to grow their dividends (your income)? I would put money on a quality focused ETF smashing most LIC's (particularly those so addicted to fully franked dividend paying companies, aka ASX20 dinosaurs) over the next 5-10 years.

Hi James, I came to the same conclusion when I crunched the numbers here: https://blog.stockspot.com.au/compare-lic-vs-etf/

I also think many investors overlook that the NTA discount is a structural issue, not a cyclical one. LICs tend to trade at a discount when investors believe there’s no future alpha being generated, so the fees simply drag on what are essentially index-like returns. When a fund trades at a premium, it’s usually because investors expect outperformance. But as you point out, that outperformance doesn’t always happen.

A worthwhile effort.
LIC's cover specific areas of the Investment spectrum as do EFT's. So, to compare the lot of LICs with EFTs appears rather difficult
I would question that as per your chart 2 the inclusion of FGG and the missing out of WAM capital might help the overall appearance even though the end result will still be the same
As a retired person I prefer LICs

How is it that the NTA is structural rather than cyclical... look at the NTA history of both AFIC and Argo and see what I mean.

And as you point out, when the expectation of underperformance exists, it doesn't always happen. But my steady dividend says otherwise.

I expect that if after tax returns were considered the results may be different? ie. LIC's pay fully franked dividends and ETF's have to distribute capital gains each year.

VAS dividends are paid quarterly and are 85% franked YTD.

Correct - would be great to see an analysis of top tax rate vs mid tax rate vs super vs pension and include franking in each

Thank you Dudley for pointing out that the distribution yield on my YMAX shares more than made up for the capital loss of 30%.
I have checked my records and find that after taking in to account actual distribution receipts less capital loss I had an actual return of 3.9%p a. over the 10 years I held the investment.

I compare this to my favourite LIC - AUI which had an average return over 10 years of 10.2%

An article about LICs < ETFs, written by a firm sponsored by ETF companies. Difficult to rely on the LIC performance data provided considering the conflicts of interest implicit. Moreover, you've excluded from your analysis LICs of fund managers that also sponsor First Links (Orphir, Clime etc.).

ETFs are probably the better vehicle, especially for structural reasons, but let's try provide more objective analysis next time. I'd prefer not to throw First Links into the ever growing pile of biased BS out there.

Peter, that wasn't the intent of the article. Here, I've focused on the largest LICs. Ophir and Clime aren't in that category and that's why I didn't include them. I imagine if I did include them, I would have been accused of bias too.

This was purely to look at the black and white performance of large LICs.

By the way, most of our sponsors are fund managers rather than ETF providers.

I always strive to be independent for our readers. 

Noted, thank you James.

I did a check against the BKI reported September Portfolio Performance and it was materially better than the table in the article? BKI also noted performance is measure din pre-tax NTA and is after allowing for payment of expenses and income and capital gains tax. That suggests not comparing like with like given no tax payments occur at the ETF level? I wonder how thorough the underlying work has been that sits behind these comparisons?

Tony, that's incorrect. The performance in the table above aligns with the BKI TSR returns on their website.

Thanks James, I noted Portfolio Performance, not TSR. I'm relying on the NTA and Monthly Report for September 2025 released 9/10/2025.

HI James,
Thanks very much for this, hopefully it answers some questions but I expect there will still be those who cherry pick (what about income & franking credits I hear many say!). One thing I would add is that usually if one uses an advisor or just a bit of prudence, we would have a portfolio of investments, so while you may be fortunate to get one of the better LIC performers in all likelihood it will be diluted by other LIC's you may hold. And you yet again show why focusing on local investments is costing investors big time. $10,000 invested in the ASX over 10 years has grown to $26,200, but international it would be $35,800.
Perhaps another comparison that might enlighten readers would be a comparison of dividends (yield/absolute, not sure of the best metric) versus long term performance. I suspect a focus on companies paying large, fully franked dividends are foregoing considerable growth for a sugar hit today, which may be part of the LIC problem, they know their investors and what they seem to want! And even Peter Thornhill will show that a growing company with a smaller dividend will eventually match the dollar amount of a higher dividend paying company with negligible growth, if you're patient (and of course the former will show capital gains as well). He did such a comparison with I think Westfield shares many years ago (the malls versus the operating company I recall, but don't quote me!).

Thanks James for the article. The binary analysis - LICs vs EFT, becomes potentially compromised if Australia follows the recent developments in the USA.

The recent decision by the US SEC, which granted Dimensional Fund Advisors the ability to offer EFT's within Mutual Funds (LIC equivalent), is being called a landmark decision. Effectively, it allows for a conversion process to be done and this is taking off - 80 other applications with the SEC.

In Australia, LICs can't hold EFTs, as far as I am aware due to regulations.

In the Australian context, if the same approvals were given by the regulators and the ATO did not warrant this as a capital tax event via a tax ruling, it makes sense for Australian LICs to follow suit, if trading below NTA.

The question I ask,
1) is anything progressing in Australia to follow the USA?
2) does the LIC industry have a representative body that could lobby for this change?

"In Australia, LICs can't hold EFTs, as far as I am aware due to regulations."

DUI holds ETFs for its international exposure.

The 1.33% cost for MFF is perhaps from the LMI report but is incorrect.
The full management and admin costs (excluding interest expenses - same as calculated by AUI) from the FY25 annual report is 0.23% of assets under management. The equivalent measure for FGG is 1.05%.

I meant the Independent Investment Research LMI/LIC report.

YKC,

I'll look into this.

James

Yes about 0.2 I had the pleasure of speaking to Chris Mackay when I rang Magellan to enquire about Management fees before I invested. I told him all platforms state around 1 percent plus performance fees, basically said most resources are full of crap and to read their financial statements....

Hi YKC,

The table on page 9 of the latest MFF annual report indicates that it's 0.5%: https://www.mffcapital.com.au/wp-content/uploads/2025/08/MFF-Annual-Report-2025.pdf

The initial figure came from a separate source, as you noted.

I have now corrected the figure in the table in the article.

Thanks James - super helpful as I wasn't aware of that table.
I was dividing by the closing investment size plus cash and I left out Other Expenses.

FGX and FGG are Fund of Fund entities which are charged 1% by their managers - but the fee is not paid to the managers and is donated to a range of charities - and which investors can nominate for the equivalent of what fee would have been paid on their investment.

I use an ASX 300 Index and MSCI World Index in my Industry Fund (investment cost 0.06%) and LIC’s personally and in my Investment Company. I have used ETFs, but they are messy from an admin viewpoint and make income planning difficult.

I don’t mind buying LICs at a discount - as improves the yield (after taking account of franked dividends and capital gain discounts). I buy active and passive LICs. I like the steadiness of the dividend stream and look to how many years of dividend reserves are available for the recession years that will eventually come.

What was not mentioned in the comparison was that LICs are closed funds whereas ETFs are open ended. ETFs survived the pandemic - but there always remains the prospect of a panic that might cause substantial capital losses - as we have occasionally seen over a longer time frame for Managed Funds.

Hi Ian,

On FGX and FGG, I get it re. fees. Investors still pay that fee; it just goes to charity rather than managers.

My experience with ETF's has been largely negative.
Example - purchased Betashares YMAX in April 2015 at $11.26 per unit and sold them in August 2025 for $7.85 each - a loss of 30% over the 10 year period.
I note that Betashares list the 10 year performance of YMAX as 6.9% p a.

Jim S

"My experience with ETF's has been largely negative."
"purchased Betashares YMAX in April 2015 at $11.26 per unit and sold them in August 2025 for $7.85 each - a loss of 30%":

https://www.marketindex.com.au/asx/ymax/advanced-chart

'ADJ', Indexed to 100 at 01/05/2015, YMax 174.5 at 01/10/2025
= (174.5 / 100) ^ (1 / ((DATEVALUE("01/10/2025") - DATEVALUE("01/05/2015")) / 365.25)) - 1
= 5.5% / y

Lost on price, gained more on dividends.

And some SMA managed accounts have done well also.

James - Good article, but we may need to revisit the performance data. It appears to differ from the reported performance of some of the corresponding managers (assuming 30Sept25 is the latest reporting period).

Hi Shane, it can differ in different ways. For instance, a number of LICs include franking in their returns. These tables are ex-franking.

Thanks, do you know what's going on with FGG. 10 year portfolio performance is 10% before taxes and franking. Fee is 1%.
There are other expenses and taxes but we're getting into small fractions of percentage points.

This analysis does not include dividends and franking credits. Total return including those elements would be a better measure of relative performance. Volatility of dividend returns is also a very important consideration for retirees, and LICs have an advantage there I believe.

Mike, that's not right - it does include dividends.

OK, sorry. On closer look dividends are included, but not franking credits.
Total after-tax return for an Aussie investor would be a better comparator.
Nevertheless, looking backwards up to 10 years, ETFs have outperformed LICs.
However, the next 10 years are what is relevant. In my mind buying assets for 85c in an LIC when the same assets cost $1 in an ETF or on-market must be a good bet to pay off going forward. Higher current running yield and likelihood of reversion to mean is playing the odds for a better outcome. Isn't buying things for cheaper than they are worth how Buffett made his money?

Hi James, the first and third tables in this article clearly says 'share price' - are you sure the figures shown therein include dividends?

Hi Alex,

Yes, it's inclusive of reinvested dividends.

No surprises here. I would have expected the market cap weighted ETF to have ‘outperformed’ the LICs in recent years. What I will be more interested in is how the comparison stacks up in the next recession. Unfortunately, we don’t have comparative data from the last major recession in Australia (1990s). Any conclusions drawn prior to then are misleading.

Something that puzzles me, James; is how the ETF's, which replicate the index, can in some instances give a higher return than the index.

Hi John,

That's not the case. As mentioned in the article, VAS tracks the ASX300 index while IOZ and A200 track the ASX 200.

James, good article. Would be interesting to see volatility of the income distributions and dividend growth from the companies in the tables. As for me that's all that really matters if we are not consuming capital in the future.I hold VAS in MLC super as it's the cheapest option amongst other high fee managed funds . I'm 20 years from retirement , I'll be switching to LICs possibly via a smsf due to fully franked dividends and smoother income distributions. I'm not concerned with beating benchmarks etc , all this over thinking and tinkering can cause a well thought out, long range plan to be derailed because of a short term period of underperformance. Pick a strategy and stick to it. The greatest risk to investors in equities is getting scared out of them.

Franking credits. The AFIC website quotes returns including franking credits as follows:
5 years
Net asset per share growth plus dividends, including franking 12.0%
Share price growth plus dividends, including franking 7.8%
S&P/ASX 200 Accumulation Index, including franking 14.5%
10 years
Net asset per share growth plus dividends, including franking 10.3%
Share price growth plus dividends, including franking 8.1%
S&P/ASX 200 Accumulation Index, including franking 11.6%
Of course you can use the above quoted ASX200 accumulation (incl franking) against any other LIC as most large ASX ETF's will have a very similar return.
OK this is not the only LIC but it is the biggest. Argo, 2nd biggest don't give the same numbers in a table, they use a graph over 20 years and this shows share price return was just 2%/year. !! Incl dividends was 6.25%/yr and incl franking this was 8.04%/yr. I don't have the franking result but the 20 yr ASX total return (accumulation index, incl dividends but not franking) shows an 8% return. So expect a franked up result around 10.6% assuming similar proportion franked.
Then there is a very handy website courtesy of Dudley some years ago (I did copy the link thanks Dudley!) where S&P include various franking credits (varying based on tax situation). It doesn't do 20 years which is why is didn't have the 20 year equivalent.
https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200/?currency=AUD&returntype=FT#overview
So, the two biggest LIC's using their own data are significantly short of the ASX200 index many index funds would track, even when we factor in franking credits. But I still suspect that won't satisfy the die-hards. Oh well.

I have also used it since Dudley put it up. Thx Dudley

What about the benefits of the income and interest deduction that some LIC companies have as
part of their dividend. This comes about from capital gains tax they have paid. This deduction comes off
your taxable income . MIR is a good example. Why isn’t this talked about?

Not sure that NTA comparison is a good one when many LICs trade at a discount or premium to their NTA. Should we compare share price and income over the years to get a better idea. Different investors would have different tax situations.

Time to give LIC bashing a rest. Let's not destroy the industry as they are a valid investment and there are other other companies underperforming which do not attract this much attention.

James, as a long term LIC investor, my reality is yearly dividend income increases (AFI, AUI, WHF and also the conglomerate SOL).
The increasing tax-paid cashflow is the most significant reality in the long term for normal people like me who only look at their portfolios at the end of the month for the express purpose of transferring their fully franked dividends to their bank accounts.
This article is clever, but not compelling in the real world.