ETFs and how to invest in them

Exchange-traded funds, or ETFs, trade on stock exchanges just like shares. Read here what ETFs are all about and start investing in them today.

What are ETFs?

  • Exchange-traded funds, or ETFs, are investment funds that trade on stock exchanges just like shares. In other words, you can buy and sell units of an ETF on a stock exchange. 
  • In addition to the buy and sell orders submitted by other investors, all ETFs have continuous buy and sell quotes set by a market maker, who is the ETF’s issuer or its contracting partner. Market making guarantees the liquidity of the ETF and keeps the market values of the ETF and its portfolio close to each other.
  • ETFs usually track an index, such as the OMX Helsinki 25 or MSCI World. ETFs are traded just like shares during stock exchange trading hours.
  • Similar to index funds, ETFs are primarily passively managed funds. Read more about index funds.

Pros of ETFs

  • Cost efficiency: ETFs have low costs, as they are usually passive index funds, which involve no active investment costs, such as portfolio management fees. 
  • Diversification: Nordea offers a wide selection of ETFs that provide easy diversification across various sectors and asset classes etc., enabling small-scale investors to invest in markets and asset classes that would otherwise be unavailable to them (like corporate bonds). 
  • Convenience: Investing in ETFs is as easy as investing in shares. You can monitor the value of the investments in the same way in real time. ETFs have continuous buy and sell prices available during the trading hours of stock exchanges. 
  • Transparency: You can view the contents of your investment on the issuer's website where both the structures and holdings of ETFs are often presented transparently.

Cons of ETFs

  • Investing in ETFs requires a certain amount of effort. In actively managed funds, the portfolio manager follows the market closely and executes trades as the market situation changes. The portfolio manager also ensures the appropriate balance between risk and return, but if you invest in passively managed funds, you will need to make these decisions by yourself.
  • You can’t outperform the index. With a passive fund, all you can expect is the average market return, also called index return, minus the fund’s fees. This means that your return will always be slightly lower than that of the benchmark index. An active fund, on the other hand, seeks to outperform its benchmark index and provide a higher return than the index.
  • ETFs are passive shareholders that don’t punish the managements of companies for making errors. For example, passive index funds don’t require companies to run their operations sustainably or to have good governance. In active funds, however, sustainability aspects are an integral part of risk management to reach the objective of better returns in the long term.

ETFs offered by Nordea

How to start investing in ETFs

  • Nordea offers thousands of ETFs in its trading services. These ETFs invest in the bond markets, equity markets, various sectors and commodities. Read more about ETF issuers
  • You can invest and trade in ETFs through Nordea Investor or Nordea Netbank, for example. 
  • ETFs trade on a stock exchange, so before getting started, you will need a book-entry account and a trading service. You can get both of these for free from Nordea if you make at least one trade every calendar quarter.
  • The ongoing charges of ETFs typically range between 0.2% and 0.8%. In addition, you will have to pay a brokerage fee for stock exchange trading, which for small sums is 1% at maximum and 0.06% at minimum, depending on how actively you trade. Read more about our prices and trading services.
  • On the stock exchange, an ETF transaction is executed at the prevailing market price of the ETF and the cash is transferred two days after the transaction is executed.

How ETFs work?

Physical ETFs own their underlying assets (such as shares or bonds) and divide the ownership into fund units. Unit holders are entitled to receive their share of the profits, such as the accrued interest or dividend yields. As ETFs trade on the stock exchange, you can buy and sell units as easily as shares.

To be able to track the index as closely as possible, the issuer of an ETF buys and sells shares continuously, which results in trading costs for the fund. The management fees and trading costs of ETFs are considered to be the primary factor causing a difference between the underlying asset and the ETF (called tracking error).

Besides costs, investors should compare the historical tracking error of various ETFs, because if the cheapest ETF does not track its underlying assets very well, the slightly more expensive ETFs with a smaller tracking error may provide a better return after costs. Investors should also decide whether they want an ETF that pays out its dividends or an ETF that reinvests them. If you prefer a cash flow, you should choose an ETF that pays out dividends. If you want to benefit from the effect of compound interest, you should choose an ETF that reinvests its dividends.

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