Exchange-traded funds combine the best of equities and mutual funds
A couple of weeks ago we wrote about funds, and one of the things we touched on most quickly was Exchange Traded Funds, or ETFs. We promised that we would come back on exchange-traded funds, which of course we are doing.
Many people think that ETFs are a new instrument, but this is not the case. In fact, the first exchange-traded fund was launched back in 1990 in Canada. Its advent changed the investment landscape as it offered the benefits of combined investment and trade flexibility.
In their early days, ETFs were mainly used by institutional investors to execute sophisticated trading strategies. However, it was not long before individual investors and financial advisors embraced ETFs.
Since their introduction, ETFs have grown to become one of the most popular products in the global investment industry. Today, ETF assets in Canada amount to more than USD 158 billion, invested in more than 600 ETFs. Globally, assets in ETFs and other exchange-traded products (ETPs) amount to more than USD 6.5 trillion, invested in more than 7 430 products.
The largest European market for ETFs is provided by Deutsche Börse via their electronic exchange XETRA. On XETRA, there were thousands of exchange-traded listings. The largest global fund manager of ETFs is Blackrock, which markets hundreds of funds under the name iShares.
Sweden was one of the first countries in Europe to launch exchange-traded funds, and at the time the Stockholm Stock Exchange was the driving force behind the development and owned the Xact brand. Sweden was the first country to launch leveraged ETFs, called XACT Bull and XACT Bear, ETFs that made it possible to invest in an ETF even with a downward market trend and be able to get a higher return than the daily change in the stock market. Today, this brand is owned by Handelsbanken Fonder.
Key milestones
1990 saw the launch of the first exchange-traded fund in Canada and the first ETF in the world. Three years later, in 1993, the first ETF started trading in the US.
In 2000, the world’s first exchange-traded fund investing in bonds was launched in Canada.
Overview of different ETF types
While ETFs can be managed either passively or actively, they are all traded on an exchange and offer exposure to equities, debt securities or other asset classes. In the US there are commodity ETFs, but European legislation does not allow an exchange-traded fund to invest only in a single asset, which is why there is no exchange-traded fund tracking the price of gold or oil in Europe. However, there are other products for this purpose.
Most ETFs are passively managed and try to track a traditional market capitalization-weighted benchmark such as the S&P/TSX Composite Index or the Swedish XACT OMXS30 which tracks the OMX Stockholm 30 ESG Responsible Index (OMXS30ESG), which is an ESG-adjusted index based on the broader OMX Stockholm 30 Index. Index ETFs usually invest in the physical securities that make up an index, but synthetic swap-based index ETFs are also available.
In recent years, an increasing number of actively managed ETFs have become available. These include rules-based alternatively weighted ETFs (often called smart beta or strategic beta strategies), which try to track non-market capitalization-weighted indices usually in an attempt to outperform the market or manage risk.
Other recent offerings include balanced exchange-traded funds, or multi-asset ETFs, which provide exposure to multiple asset classes and feature regular rebalancing to maintain a desired level of risk.
Global ETF assets now total more than $6.5 trillion, invested in more than 7,430 products.
What is an ETF?
Like traditional mutual funds, ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds or other assets and in return receive an interest in that investment pool. However, unlike mutual funds, ETF shares are traded on a national exchange and at market prices that may or may not be the same as the net asset value (“NAV”) of the shares, i.e. the value of the ETF’s assets minus its liabilities divided by the number of outstanding shares.
Things to consider before investing in ETFs
Despite their name, ETFs are not mutual funds. In general, ETFs combine the characteristics of a mutual fund, which can be purchased or redeemed at the end of each trading day at its NAV per share, with the intraday trading function of a closed-end fund, whose shares are traded throughout the trading day on the market. prices. If the underlying index rises, the price of the exchange-traded fund rises immediately as it is a direct reflection of this.
Unlike fund shares, retail investors can only buy and sell ETF shares in market transactions. That is, unlike mutual funds, ETFs do not sell individual shares directly to, or redeem their individual shares directly from, private investors. Instead, ETF sponsors enter into contractual relationships with one or more financial institutions called “Authorized Participants”.
Authorized participants are usually large broker-dealers. Only authorized participants may purchase and redeem shares directly from the ETF, and they can only do so in large aggregations or blocks (for example 50,000 ETF shares) commonly referred to as “Creation Units”.
Other investors buy and sell ETF shares in market transactions at market prices. An ETF’s market price will usually be more or less than the fund’s NAV per share. This is because the exchange-traded fund’s market price fluctuates during the trading day as a result of a variety of factors, including the underlying prices of the ETF’s assets and demand for the ETF, while the ETF’s NAV is the value of the ETF’s assets minus its liabilities calculated at the end of each business day.
Different types of ETFs
Index-based ETFs
Most ETFs traded on the market are index-based ETFs. These ETFs seek to track a securities index such as the S&P 500 stock index and generally invest primarily in the securities included in the index. For example, the SPDR, or “spider” ETF, which seeks to track the S&P 500 stock index, invests in most or all of the equity-related securities included in the S&P 500 stock index. Most ETFs publish their holdings on their websites daily.
Actively managed ETFs
Actively managed ETFs are not based on an index. Instead, they try to achieve a stated investment objective by investing in a portfolio of stocks, bonds and other assets. Unlike an index-based ETF, an advisor to an actively managed ETF can actively buy or sell components of the portfolio on a daily basis without regard to consistency with an index.
Before investing in an ETF, you should read both its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objectives, main investment strategies, risks, costs and historical performance (if any). Internet search engines can help you find a specific ETF prospectus. You can also find prospectuses on the websites of the financial companies sponsoring a particular ETF, as well as through your broker. Another good site is Etfmarknaden.se where you will find almost 10,000 different articles and descriptions of mainly European exchange-traded funds.
Don’t invest in something you don’t understand. If you cannot explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment.
The Viking and exchange-traded funds
Viking’s databases now include more than 40,000 different instruments, not just shares. Since last spring, the databases contain price history for ETFs, so-called exchange-traded funds in Sweden, Germany and the USA. There is also data on more than 17,000 different funds. Read more on the Viking website.
Since spring 2023, Vikingen also offers price data on the exchange-traded funds traded in Germany, on what is known as Xetra, for just €59 per month. Price data for US ETFs, among others, are already available.
About the Viking
With Viking’s signals, you have a good chance of finding the winners and selling in time. There are many securities. With Viking’s autopilots, price data, tables and stock prices, you can sort out the most interesting ETFs, shares, options, warrants, funds, etc.
Click here to see what Vikingen offers: Detailed comparison – Stock market program for those who want to become even richer (vikingen.se)
