LICs vs ETFs: What's the Difference?

🏛️ What is a LIC?🔗

🎯 The essential: A LIC is a company, listed on the ASX, that invests in a portfolio of shares or other assets, and pays company tax on its earnings just like any other listed company.

A listed investment company (LIC) is a company, incorporated under the Corporations Act, with a board of directors, shareholder meetings and company tax obligations, that invests in a portfolio of shares or other assets. That company is itself listed on the ASX, so you buy and sell shares in it just like BHP or Commonwealth Bank. Because it's a company, it pays the 30% corporate tax rate on its earnings, issues its own shares, and has a board that decides how much dividend to pay each year.

Well-known examples on the ASX:

📦 What is an ETF? (Quick recap)🔗

An ETF is a managed fund structured as a trust, not a company, that you buy and sell on the ASX like a share. Most ETFs are passively managed, tracking an index rather than picking stocks. The key mechanic: authorised participants can create or redeem ETF units in response to demand, keeping the market price tightly anchored to NAV. See our full ETF explainer for the details, this guide keeps it brief and focuses on the comparison.

🔄 The core difference: closed-ended vs open-ended🔗

LICs are closed-ended, after IPO, the number of shares on issue is essentially fixed, and price is set by supply and demand on the ASX, not the underlying portfolio value. ETFs are open-ended, authorised participants can create new units or redeem existing ones, acting as a constant price anchor keeping market price close to NAV.

💹 NTA, premiums and discounts, the LIC quirk🔗

NTA (Net Tangible Assets) is the per-share value of everything the LIC owns minus liabilities, the "true" underlying portfolio value per share. LICs publish a formal NTA figure within 14 days of each month-end, via ASX announcements or their website, many now publish weekly estimates too.

Because LIC shares trade on supply and demand, price can diverge from NTA:

• Discount to NTA: price below NTA. Example: Argo Investments (ASX: ARG) had a pre-tax NTA of $10.38 a share as at 27 June 2025, trading at $9.04, roughly a 12.9% discount.
• Premium to NTA: price above NTA. AFIC (ASX: AFI) has historically traded close to or above its NTA, its pre-tax NTA was $6.82 as at early August 2026.

What this means for investors: buying at a discount can look attractive, getting $1 of assets for less, but discounts can persist for years or widen further, there's no guarantee the gap closes. Buying at a premium means paying more than the portfolio is worth, if sentiment shifts and the premium narrows, you lose money even if the underlying portfolio hasn't moved.

💧 Dividend smoothing, why income investors love LICs🔗

Because a LIC is a company, it can retain after-tax profits in good years rather than distributing everything, the board sets the dividend at its discretion. In a strong year it tucks profits into reserves, in a weaker year it can draw on those reserves to maintain a steady payout.

During COVID-19, the broader market cut dividends by around 25%, but AFIC maintained its dividend thanks to profit reserves and franking credit stores built up over prior years. ETFs don't work this way, as a trust, an ETF must distribute essentially all income each period, so a year of slashed company dividends means a slashed ETF distribution too.

The result: LIC dividends tend to be more stable and predictable, valuable for income-focused investors like retirees drawing down their portfolio.

🧾 Franking credits, the tax angle🔗

Both LICs and ETFs can deliver franking credits, but the mechanism differs. LICs generate their own franking credits, as a company paying the 30% corporate tax rate, dividends can carry franking credits representing tax already paid, which shareholders can use to offset their tax bill or get a refund if their marginal rate is lower than 30%. ETFs are trusts, they don't generate their own franking credits, but pass through franking attached to dividends from the Australian companies they hold. Both can deliver franked income, a LIC may deliver more in some cases because it's itself a taxpaying company. The value of franking credits always depends on your personal tax situation.

💰 Fees and management style🔗

Broad index ETFs are extraordinarily cheap, common broad Australian shares ETFs charge between roughly 0.04% and 0.10% p.a., on a $50,000 portfolio that's $20-$50 a year. LICs vary enormously, the older, large LICs (AFIC, Argo) are actually quite low-cost with MERs around 0.14%-0.18% p.a., not far off some ETFs, while many active LICs charge 0.3%-1.5%+ p.a. plus performance fees, typically 15-20% of returns above a benchmark, sometimes payable even in a negative-return year as long as it beats its benchmark.

One caveat, some ETFs are now actively managed too, so-called "active ETFs", the line is blurring at the edges. If fees are the deciding factor for you, run your own numbers through our investment fees calculator rather than relying on averages.

⚖️ LIC vs ETF, side by side🔗

🚫 3 common misconceptions🔗

"A LIC and an ETF are basically the same thing because both trade on the ASX." No, the closed-ended vs open-ended structure creates fundamentally different pricing dynamics, with an ETF you're always buying close to underlying value, with a LIC you might pay 10% more or 13% less.

"Buying a LIC at a discount is always a bargain." Not necessarily, a discount can persist for years or widen further, the underlying portfolio and manager still need to perform.

"LICs always have higher fees than ETFs." Not always, AFIC and Argo have very low MERs, around 0.14%-0.18%, it's the active LICs with performance fees that get expensive.

Both structures can also give you exposure to Australia's benchmark index, if you're still getting familiar with what that index actually is, see our guide to what the ASX 200 actually is.

❓ Frequently asked questions🔗