When eInvest was established 3 years ago, we foresaw that Active ETFs would be increasingly attractive to investors who seek to access top quality actively managed funds traded on the exchange. Especially for areas of the market where investing in the index just doesn’t make sense.
Last week, the Federal government announced it is extending the ban on conflicted remuneration to listed investment companies (LIC) and trusts from 1 July 2020. In particular, this means asset managers issuing LICs can’t pay a stamping fee to retail brokers & financial advisors. In an overnight paper, Morgan Stanley suggested that this change is likely to accelerate the growth of the Active ETF sector in Australia.
eInvest was created because we believed in the benefits Active ETF structures bring to investors, including avoiding some of the pitfalls associated with LICs. The most important reason comes down the open vs closed ended structures. LIC’s are closed ended structures, meaning there is a fixed number of units on offer on the market and the unit price can trade at a discount or premium to Net Asset Value (NAV). In recent cases, some LICs have traded at large discounts to NAV, and with sellers outstripping buyers, liquidity becomes a challenge. By contrast, Active ETFs are open ended, meaning the number of units can increase or decrease alongside the rise and fall in demand for units in the ETF. This is aided by the market maker, a third party that stands in the market and provides liquidity. It means in effect that Active ETFs are a lot more likely to trade at a price that reflects the Net Asset Value.
We also acknowledge that LICs serve a useful purpose. For accessing more illiquid assets via an exchange, LICs and Listed Investment Trusts (LITS) continue to be a popular structure. We expect them to continue an important part growing options for investors.
All in all, both structures have a shared positive, they allow tradable access to a portfolio managed by professional investment managers. Not everyone wants to pick their own stocks, but that that doesn’t meant they can’t participate in the share market. At eInvest we only focus on Active ETFs. With Active ETFs there’s no discounts to NAV and no hidden fees. We think that’s a win for investors.
Read more like this:
- ETFs vs LICs & LITs – How are they performing in the global pandemic?
- Why is the Aussie ETF market growing so fast?
Disclaimer: Please note that these are the views of the writer, Jodi Pettersen, Investor Relations at eInvest and is not financial advice.
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