Understanding Investment Structures: ETFs, LICs and MDAs

Choosing what to invest in is only one part of building a portfolio. How those investments are owned and managed can be equally important.

Different investment structures can provide access to the same underlying asset class while producing quite different outcomes in terms of liquidity, transparency, tax, fees, control and portfolio implementation.

Three structures commonly encountered by Australian investors are Exchange Traded Funds, Listed Investment Companies and Managed Discretionary Accounts. At first glance, each can appear to solve a similar problem: providing efficient access to a professionally managed portfolio. But the way they operate is fundamentally different.

Understanding those differences matters because the most appropriate structure is rarely determined by investment performance alone. It depends on how the investment needs to work within the broader portfolio and, ultimately, within an investor's overall financial strategy.

Listed Investment Companies: permanent capital with a market price

A Listed Investment Company, or LIC, is a company listed on a securities exchange such as the ASX whose principal purpose is investing in a portfolio of assets. For the investor, buying an LIC is operationally similar to buying shares in any other listed company. Shares can generally be bought or sold on market during trading hours.

The important distinction is what sits underneath the company. LICs are closed-ended investment structures. The company raises capital and issues shares, then invests that capital according to its stated investment strategy. Unlike an open-ended managed fund, the fund manager is not generally required to issue or redeem units each time an investor enters or exits.

This creates a relatively permanent pool of investment capital. From a portfolio management perspective, that can be valuable. The investment manager does not generally need to sell assets to fund investor redemptions during periods of market stress, or deploy substantial new inflows simply because demand for the product has increased. This can allow the manager to take a longer-term view when implementing the investment strategy.

But the closed-ended structure creates another consideration. The price of an LIC is determined by buyers and sellers on the share market. It can therefore trade above or below the value of the underlying investments held by the company, commonly referred to as its Net Tangible Assets, or NTA.

If an LIC is trading below its NTA, it is trading at a discount. If it trades above NTA, it is trading at a premium. That distinction can materially affect investor returns. An investment manager may perform well while the LIC's share price underperforms the value of its underlying portfolio because the discount to NTA has widened. Conversely, an investor may benefit if a discount narrows or a premium develops.

For this reason, analysing an LIC requires consideration of both the underlying investment portfolio and the market dynamics of the structure itself. Factors such as manager reputation, performance, liquidity, dividend policy and investor demand can all influence how the LIC trades relative to its underlying assets.

There is also a tax dimension. Because an LIC is a company, it may distribute profits through dividends and those dividends may carry franking credits where the relevant requirements are met. For investors who can utilise those credits, this can form an important part of the total return. It should, however, be considered alongside the LIC's investment strategy, fees, historical premium or discount to NTA and the quality of its underlying portfolio.

Exchange Traded Funds: efficient access across asset classes

Exchange Traded Funds, or ETFs, provide another way of accessing a diversified portfolio through an exchange. An ETF is a managed investment fund whose units can be bought and sold on a securities exchange in much the same way as listed shares.

This combines characteristics of traditional managed funds with the accessibility and liquidity of listed markets. Instead of applying directly to a fund manager for units, investors can generally transact through a broker during market hours.

Historically, ETFs became closely associated with passive investing. A passive ETF may be designed to replicate an index such as the S&P/ASX 200 or S&P 500. Rather than selecting individual companies in an attempt to outperform the market, the fund seeks to provide exposure to the underlying index, less fees and other costs.

This made ETFs an efficient way of obtaining broad market exposure at relatively low cost. The market has since evolved considerably. ETFs now provide access to both passive and actively managed strategies across Australian and global equities, fixed income, listed property, commodities and an increasingly broad range of sectors, themes and investment styles.

As a result, the term ETF now describes the investment structure rather than a particular investment philosophy. An ETF can be highly diversified or highly concentrated. It can be passive or active. It can provide broad market exposure or invest in a narrow sector. The underlying strategy therefore matters at least as much as the fact that the investment happens to be an ETF.

Cost also varies. Broad passive market exposures may carry relatively low management fees, while specialised or actively managed ETFs can be more expensive. The appropriate comparison is not simply which ETF has the lowest fee, but what exposure and investment process the investor is receiving for that cost.

Liquidity also deserves consideration. Being listed on an exchange does not remove liquidity risk. Investors should understand the liquidity of both the ETF itself and the assets it owns, particularly where the underlying market is less liquid. Bid-offer spreads can also widen during periods of market stress, affecting the price at which an investor is able to transact.

Other considerations can include tracking error, currency exposure, concentration risk and whether exposure to the underlying assets is achieved through physical holdings or derivatives. The simplicity of trading an ETF can sometimes obscure the complexity of what sits beneath it.

Managed Discretionary Accounts: a different approach to portfolio implementation

A Managed Discretionary Account, or MDA, operates differently again. Rather than purchasing units or shares in a pooled investment vehicle, an investor enters into an arrangement under which an MDA provider manages an individual portfolio on their behalf.

The investor and provider agree to an investment program and parameters within which the portfolio can be managed. Subject to those parameters, the MDA operator has discretion to make investment decisions without seeking approval from the investor for every individual trade.

This can significantly improve implementation efficiency. When an investment manager decides to reduce or increase exposure to a particular company, sector or asset class, changes can be implemented across relevant client portfolios promptly rather than waiting for individual transaction approvals.

For investors, that can provide the benefits of professional portfolio management while retaining an individually identifiable portfolio. ASIC's regulatory framework provides that client portfolio assets are managed as a discrete portfolio belonging to that client rather than being pooled together for investment purposes.

Depending on the MDA structure, assets may be held directly in the investor's name or held on their behalf through an appropriate custody or trust arrangement. That distinction can have important consequences for transparency, administration and taxation.

Where investments are held directly or beneficially for an individual investor, transactions and their resulting tax positions may be attributable specifically to that investor rather than being generated within a pooled fund. This can create greater visibility over realised capital gains and losses, income and, where relevant, franking credits. The precise tax outcome depends on the ownership structure and the investor's individual circumstances, so these potential benefits should not be viewed in isolation.

An MDA may also provide greater visibility over the individual securities held within a portfolio. For families managing investments across multiple entities, including individuals, companies, trusts and superannuation structures, that level of transparency can be particularly useful when considering portfolio exposures, tax positions and overall asset allocation.

These structures are not mutually exclusive

It can be tempting to frame ETFs, LICs and MDAs as competing alternatives. In practice, they can complement one another.

An MDA is primarily a portfolio management and implementation structure. Within that portfolio, the manager may hold securities directly while also using ETFs or LICs where they provide efficient access to a particular market, manager or asset class.

At Core, the MDA is an implementation structure rather than an investment philosophy in itself. Our investment approach is grounded in disciplined long-term investing, with a focus on quality businesses, diversification, risk-aware portfolio construction, income and transparency. The MDA allows those decisions to be implemented efficiently across Australian shares, global shares, listed property and income assets, while ETFs and LICs can be used where they provide the most appropriate access to a market or strategy. Core's preference for direct ownership where appropriate also reflects a focus on liquidity, transparency and avoiding unnecessary layers.

Performance should still be assessed separately from structure. Core's corporate brochure reports 2025 portfolio returns of 13.0% for Australian Equities, 12.6% for International Equities and 10.5% to 13.2% across balanced superannuation strategies, with each reported as outperforming its relevant benchmark. Those results are historical and should be considered alongside the strategy, benchmark, risk taken and investment horizon. They do not establish that an MDA, or any other structure, is inherently superior. Past performance is not a reliable indicator of future performance.

The question is therefore not necessarily whether an investor should use an ETF, an LIC or an MDA. A more useful question is what each structure contributes to the portfolio.

An ETF may provide an efficient way to obtain broad or specialised market exposure. An LIC may provide access to a particular investment manager through a permanent-capital structure, potentially with franked dividend income. An MDA may provide direct portfolio implementation, transparency and the ability for an investment manager to make timely decisions within agreed parameters.

Each introduces different considerations around liquidity, fees, taxation, control and investment risk. The relevant trade-offs will depend on how the structure interacts with the rest of the portfolio.

Structure should follow strategy

Investment structures are tools. The fact that one structure is lower cost, more liquid or more tax efficient in a particular circumstance does not automatically make it the better investment.

The starting point should be the portfolio objective. What return is required? What level of risk is appropriate? How much liquidity is needed? Where should assets be held? What tax considerations apply? Does the investor require regular income? How important is direct ownership? Are there existing capital gains or losses that need to be considered? How does the portfolio interact with estate planning and the wider family balance sheet?

Only after those questions are understood does the choice of investment structure become meaningful. For some investors, a straightforward portfolio of ETFs may provide an efficient solution. For others, direct securities, LICs, specialist managers and discretionary management may each play a role. Often, the appropriate outcome is a combination.

The objective is not to choose a preferred structure and build the portfolio around it. It is to define the investment strategy first, then select the structures that allow that strategy to be implemented efficiently.

Ultimately, the vehicle through which an investment is held can influence the outcome just as meaningfully as the investment itself. At Core, the starting point is to define the objective, consider how the investment fits within the wider balance sheet, and then select the structures that best support the strategy. That keeps the structure in its proper role: a tool for implementation, not the strategy itself.

References and sources

1. Australian Securities Exchange (ASX). How to issue LICs and LITs.
2. Australian Securities Exchange (ASX). Understanding LIC premiums and discounts, 7 June 2024.
3. ASIC MoneySmart. Exchange traded funds (ETFs).
4. Australian Securities and Investments Commission (ASIC). Regulatory Guide 179: Managed discretionary accounts.
5. Australian Taxation Office (ATO). Franking distributions.
6. Core Wealth Advisors. Corporate Brochure and B2B Services Brochure, 2026.

Sources accessed 11 August 2026. Data and regulatory settings may change over time.