About ETFs

Exchange Traded Fund (ETF) – A simple guide to how they work

What is an ETF?

An exchange traded fund is a fund that is traded on the stock exchange, much like a stock. ETF stands for "Exchange Traded Fund". ETF and exchange traded fund are used synonymously.

ETFs have the same distribution of risk as a traditional fund, but there are some important differences.

The difference between an ETF and a traditional fund

ETFs are traded and priced in real time on the stock exchange

The primary difference between an ETF and a traditional fund is that an ETF is traded over the stock exchange. This means that the price is set and can be purchased or sold in real time, in the same way as a stock. As the price in the underlying assets of the ETF changes during the day, the price of the ETF will also change. Depending on when you place your order during the day, the set price will be calculated at the exact time the order is executed. As an investor, this gives you the opportunity to sell directly when there is significant market volatility or to purchase and sell in the same day.

In contrast, the pricing for traditional funds is calculated only once each day. As a result, it does not matter when the order is submitted, since all of the orders will receive the pricing (NAV) that is set at the time of the fund’s valuation.

ETFs have low fees

Many ETFs are also known for their low management fees. One reason is that they are most often index funds. With index funds, the fund manager does not need to take any active investment decisions and, instead, invests in the assets, and in the unit, that is stated in the index tracked by the fund. Consequently, ETFs can be managed at a lower cost than a traditional actively-managed fund.

ETFs are transparent and predictable

ETFs are characterised by clarity and transparency. Since the vast majority of ETFs are index funds, there usually are no surprises. An ETF moves just like the market it is tracking. As a result, you can benefit from using ETFs as easy and inexpensive building blocks for creating your investment portfolio.

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LEVERAGE

This is how XACT Bull & Bear work

A leveraged product is an investment that enhances the growth of an underlying asset over a specified period of time. This enhancement is called the leverage factor, which can be 1.5, 2.0, etc. The leverage factor can be either positive or negative.

Our ETFs with leverage are designated as XACT Bull and XACT Bear. Leveraged ETFs are suitable if you firmly believe that the market is moving in a certain direction–irrespective of whether you believe in a upturn or a downturn. With Bull, there is the potential for good returns when the market rises and with Bear when the market falls.

Leveraged products offer an opportunity for higher returns, but also have a higher risk. It is important to remember that the leverage in XACT Bull and XACT Bear ETFs is calculated on a daily basis. There is a difference between a leverage that is calculated on a daily basis and one that is calculated over a longer period of time. Over an extended period, the return for Bull and Bear ETFs will not be the return for the entire period multiplied by the leverage factor; but rather, the result of the combined daily changes during the period.

A simple guide to XACT Bull

The XACT Bull ETFs have the potential for good returns when the market rises. XACT ETFs are available with leverage of 1.5 and 2 times the daily percentage change in the underlying market. It is important to remember that if the underlying market falls, the return in the ETF will also fall by this leverage factor.

We assume that you believe the Stockholm stock market will go up so you invest in XACT Bull 2 which tracks the OMXS30™ index with a daily double leverage. The leverage means that if the index rises by 2 percent in one day, the value of XACT Bull 2 will rise by approximately 4 percent. Conversely, if the index falls by 2 percent in one day, the value of XACT Bull 2 will decline by 4 percent on that same day.

A simple guide to XACT Bear

XACT Bear ETFs increase in value when the market falls. XACT has ETFs with inverse leverage of 1.5 or 2 times the daily percentage change in the underlying market. It is important to remember that if the underlying market rises, the return in the ETF will also decline by this leverage factor.

We assume that you believe the Stockholm stock market will fall so you invest in XACT Bear 2 which gives you twice the upturn as the daily percentage decline in the OMXS30™ index. If the index falls by 2 percent in one day, XACT Bear 2 will rise by approximately 4 percent that day. Conversely, if the index rises by 2 percent, the value of XACT Bear 2 will decline by approximately 4 percent on that same day.

The value of XACT Bull & Bear is determined by the daily change in the market.

The return in our ETFs with leverage is calculated on a daily basis.

If you invest the same amount of money in XACT Bull and XACT Bear in the same underlying asset and keep both investments for one day, they will become the mirror image of each other. However, if you keep them for a longer period, the ETFs will not perform at a steady upward or downward rate, respectively.

During periods where the underlying assets fluctuate in the same direction, the return in XACT Bull and XACT Bear, respectively, will be higher than 1.5 or 2 times the daily performance. In other words, there will be a compound interest effect.

During periods where the underlying assets rise and fall inconsistently with each other, the return in XACT Bull and XACT Bear, respectively, will be lower than 1.5 or 2 times the daily performance. In other words, this scenario generates a negative compound interest effect.

As a result, if a market has a clear trend, up or down, it is advantageous to own leveraged products.

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Risk Disclaimer:

Historical yields are not a guarantee of future returns. The money you invest in a fund can both increase and decrease in value and it is not guaranteed that you will recover the entire invested amount. The complete information brochure, fund rules and fact sheets is available under each fund.

TRADING

As easy as trading stocks

Investing in ETFs is easy. Fund units are bought and sold individually on the stock exchange, just like stocks. Trading with ETFs also has the same settlement schedule as stocks (transaction date plus 2 business days), which also makes ETFs well-suited in a portfolio consisting of individual stocks.

An order is placed for the number of ETF units to be bought or sold and the only requirement is a custody account or an investment savings account (ISK). Fund units can also be registered at an IPS account or an insurance custodial account. When ETFs are bought and sold, a commission is paid in accordance with applicable pricing.

Market makers set prices

Handelsbanken Fonder has agreements with several market makers who set bid and ask prices during the entire trading day based on the value of the funds in real time. This means that you can buy and sell ETF units at any time during the opening hours of the stock exchange. In Sweden, XACT ETFs are traded on Nasdaq Stockholm. We also have ETFs listed on Oslo Börs and Nasdaq Copenhagen.

Liquidity and spread

An ETF reflects the performance of a specific market index or strategy. The market makers set prices for the ETF based on the price change in the underlying assets. Both liquidity and the difference between the bid and ask price (“spread”) are linked to the underlying assets in the ETF. For example, the spread is normally wider in a small cap ETF compared to an ETF that tracks an index with only large caps. The liquidity and the spread in the ETFs can vary continuously intraday. However, the presence of the market makers means that there are liquidity and trading opportunities in ETFs even if there are a few number of trades in the ETFs.

Currency exposure

XACT ETFs are not currency-hedged. This means that as an investor, you will have a currency exposure in the funds that have holdings listed in currencies that are not the same as the ETF’s trading currency.

Trading

FREQUENT QUESTIONS

What is an ETF?

An ETF is an exchange traded fund with fund units that are traded in real time on the stock exchange, in the same manner as a stock. ETF is an acronym for “Exchange Traded Fund”.

Is an ETF a fund?

Yes, legally and for tax purposes an ETF is a fund. XACT ETFs are managed by Handelsbanken Fonder and are under the supervision of the Swedish Financial Supervisory Authority.

Are ETFs a new innovation?

ETFs were developed by US fund managers in the beginning of the 1990s and have revolutionised investment strategies. They are used by both institutional and private investors and are now one of the most popular financial instruments. Exchange-traded funds have been available in Europe since 2000, which was the same year that the first XACT ETF was listed in Sweden.

What are XACT Bull and XACT Bear?

XACT Bull and XACT Bear are the terms we use for our ETFs with leverage. Bull may be suitable for investors with a strong outlook for positive performance on the stock market, while Bear provides the opportunity for good returns during a downward trend in the stock market. It is important to understand how these funds work before making an investment in one of these funds.

How can I use exchange-traded funds?

Exchange-traded funds provide you the opportunity to combine the advantage of a fund as related to the distribution of risk, with the advantage of a stock as related to trading. Instead of managing a large basket of stocks on your own, you can track the performance of the stock market through securities (ETFs). You can also use ETFs as a foundation in your portfolio and complement it with direct savings in stocks. ETFs are also suitable if you are interested in a simple and quick way to take advantage of the daily upward and downward movements of prices on the stock market.

What is index management?

With index management, the fund manager invests based on a pre-determined model, which is frequently a market index. Therefore, the returns on the index fund depend on which index is tracked by the fund. We offer both funds that track a market index, such as XACT OMXS30, as well as funds that track an index that is determined and weighted based on other parameters. An example of this is XACT Högutdelande, which focuses on companies with high dividend yields and historically low volatility, where both the incoming companies and their weighting in the index is determined by these parameters. The returns for an index fund will be the market performance minus the management fees. In general, the management fees in index funds are lower, since index funds do not conduct any company analyses, but rather track an index.

What distinguishes an exchange-traded fund from a traditional fund?

The primary difference is that an exchange-traded fund, like a stock, is traded and priced in real time. Depending on when an order is placed during the day, the order will be settled at the price that is applicable at the time the order was executed. In contrast, a traditional fund is priced only once each day. In this case, it does not matter when fund units are purchased or sold during the day–one and the same price will apply regardless of when the order was placed.

What are the requirements for trading in ETFs?

To trade in ETFs you need a custody account, an IPS account or an insurance custodial account, or an investment savings account (ISK).

What are the costs associated with exchange-traded funds?

Costs consist of a commission and a management fee. When buying and selling fund units, you will pay a commission fee in accordance with applicable pricing at your bank or stockbroker. The annual management fee for our ETFs is between 0.10 percent and 0.80 percent of the fund value, depending on which fund you choose

Are orders placed for a certain amount to be traded, as with traditional funds?

No. When trading with exchange-traded funds, an order is placed for the number of units you want to buy or sell, just like with stocks.

How large is a trading unit?

A trading unit for the funds listed on the Stockholm stock exchange is equivalent to one (1) unit. Thus, you can trade in as many units as you would like, e.g., 1, 47, 739.

Does the fund require a minimum holding period?

No. You may purchase and sell your fund units as many times as you would like during a trading day.

How are the funds traded?

The fund units are traded on the stock exchange – as with stocks – through a bank or stockbroker. The funds are traded in the same manner as a stock. You can purchase and sell fund units as frequently as you would like – and when you would – during a trading day under the condition that you have sufficient resources in your custody/bank account.

How is pricing done?

Independent market makers are continuously quoting bid and offer prices of fund units based on the fund´s value in real time.

When does trading open and close in XACT ETFs?

Trading starts at 09:00.30 with an opening auction and closes at 17:25 without a closing auction.

Does the fund pay out dividends?

XACT Sverige and XACT Högutdelande normally pay cash dividends to unit holders. Other Sweden-registered funds reinvest all earnings in the fund.

Are XACT ETFs included in premiepensionen?

No.