Index killer? Here's how AFIC (ASX:AFI) shares stack up to the ASX 200

Much has been made of the rise of the exchange-traded fund (ETF) over 2021 thus far. Especially since this year has seen the ASX ETF sector swell to a record size in terms of funds under management (FUM). But it wasn't that long ago that there was no such thing as an ASX ETF. Yes, the first ASX ETF only launched in 2001. So what did investors who wanted broad, diversified market exposure do before that? Well, one solution was investing in Listed Investment Companies (LICs) like the Australian Foundation Investment Co. Ltd (ASX: AFI).

ETFs and LICs

LICs were about the closest thing to an ETF you could get before there were actual ETFs. A LIC is a company and not a trust, as an ETF is. But it still invests in other underlying shares for the benefit of its shareholders, as an ETF does. AFIC is one of the oldest LICs on the ASX, having first opened its doors way back in 1928, a good ten years or so before the onset of the Second World War.

But nowadays, investors wanting broad diversification in a single company or fund are spoilt for choice. And many investors would rather just own the market and get the market's return through an ETF rather than trying their luck with a LIC.

But is this attitude a good one to have? Let's check out how AFIC shares have performed against the S&P/ASX 200 Index (ASX: XJO) over the past 6 months. We'll use the iShares Core S&P/ASX 200 ETF (ASX: IOZ) as a benchmark, since it is the most popular ASX ETF covering the ASX 200 Index.

So IOZ units have returned approximately 3.28% over the past 6 months, including dividend distributions. How does AFIC compare?

Well, the AFIC share price alone is up 8.95% over the same period, including the 1.2% jump we see today. Including the 14 cents per share final dividend investors received in August, and we get a return of more than 10%.

So AFIC has clearly trounced the ASX 200 over the past 6 months.

How do AFIC shares measure up to the ASX 200?

But let's zoom out. Over the past year, the ASX 200 ETF has returned roughly 15.36%, including dividend distributions. AFIC, in contrast, has delivered a 19.5% return over the same period, also including dividends.

Over five years, IOZ units have averaged an annual return of 9.96%. AFIC again bests it with a 13.8% average.

So how has AFIC managed to outperform its own index so consistently? Well, by not holding the same shares in the same proportions as the index. For example, AFIC tells us that its top 5 holdings as of 30 November were:

1. Commonwealth Bank of Australia (ASX: CBA) with an 8% portfolio weighting
2. CSL Limited (ASX: CLS) with a 7.3% weighting
3. BHP Group Ltd (ASX: BHP) with a 6% weighting
4. Macquarie Group Ltd (ASX: MQG) with a 4.7% weighting
5. Wesfarmers Ltd (ASX: WES) with a 4.6% weighting

In contrast, here are the current top five holdings and their weightings in the ASX 200:

1. Commonwealth Bank with an 8.05% weighting
2. CSL with a 6.2% weighting
3. BHP with a 5.83% weighting
4. National Australia Bank Ltd. (ASX: NAB) with a 4.47% weighting
5. Westpac Banking Corp (ASX: WBC) with a 3.66% weighting

So as you can see, these two portfolios do differ quite significantly, with AFIC clearly giving the big four ASX 200 bank shares a wider berth than the index itself.

This differentiation from the index has evidently worked in AFIC favour over the last few years. But who knows what the next few hold.

At the current AFIC share price of $8.41, this ASX LIC has a market capitalisation of $10.31 billion, with a dividend yield of 2.85%.