ETFs and index funds

Cost-efficiency has made passive funds like ETFs and index funds very popular investments. But what are ETFs and index funds, should you invest in them and how can you get started?

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What are ETFs and index funds?

  • ETFs are exchange traded funds that usually track an index, such as the OMX Helsinki 25 or MSCI World, to give a couple of examples. ETFs are traded in the same way as shares during stock exchange opening hours.
  • Index funds are equity funds that track a certain benchmark index. The funds’ buy and sell transactions are triggered automatically based on developments in the benchmark index. Unlike ETFs, index funds are not listed on a stock exchange.

How do passive funds work?

Index funds and most ETFs are passive funds that track a certain index.

Passively managed funds aim to keep their portfolio allocation as close to their benchmark index as possible, due to which they are also sometimes called index funds. Many fund management companies offer passively managed index funds, but increasingly when people refer to passive funds, they mean ETFs (exchange traded funds) which, as the name suggests, are traded on a stock exchange just like other securities.

A passively managed fund will trade only when its index is updated to reflect the situation in the markets. This can take place two or four times a year, for example. For this reason, the portfolio manager of a passive fund does not have to conduct a market analysis or apply their view of the market. As a result, the fund’s fees are lower than in actively managed funds, which aim for a higher return than the market average through stock and sector picking.

The name is slightly misleading, however, as the management of every fund involves a certain measure of active decision-making. Even an index fund requires its manager to take a view on such aspects as the criteria for tracking the average performance of the market and on how the index is actually composed.

Pluses of passive funds

  • Cost-efficiency. The management fees of passive funds are usually lower than those of actively managed funds.
  • Good diversification compared to direct equity investments.
  • Investors can influence the asset class and country allocation of their investments. Passive funds are suitable for investors who possess the skills, time and interest to manage their personal investments. Unlike active funds, which offer a ready-made solution, passive funds require investors to spend some time on managing their investments.
  • No fund manager risk. The fund manager does not influence investment decisions because the fund tracks its benchmark index.

Minuses of passive funds

  • Investing requires a certain amount of effort because the investor must choose the different funds and update their personal portfolio regularly. In a balanced fund, the investor gets everything in one easy package.
  • You cannot outperform the index. With a passive fund, all you can expect is the average return of the market, i.e. the index return, minus the fund’s fees. This means that your return will always be lower than that of the benchmark index. An active fund, on the other had, aims to outperform its benchmark index, i.e. it strives for a higher return than the index.
  • Index funds are passive shareholders that do not punish the managements of the companies they invest in for their errors, which means the funds’ sustainability rating is not very high. In active funds, on the other hand, sustainability is taken into account as an integral part of risk management with the aim of achieving better long-term returns.

Good investment decisions are based on an investment plan

  • You should start investing in ETFs and index funds in the same way as in any other assets. First, it’s worth preparing an investment plan. This involves thinking about what kind of return you are seeking, how long you plan to invest and how much risk you are willing to tolerate. 
  • Over the long term, monthly saving will provide good time diversification. You can start monthly saving in Nordea Mobile or Netbank if you have an account with Nordea.
  • You can also check your investment profile with Nora, our digital savings adviser, or by booking an appointment with us. The funds offered by our digital savings adviser Nora are cheap, consisting of semi-passive Enhance funds. Nora also offers monthly saving alternatives.

Index funds offered by Nordea

  • The selection of index funds offered by Nordea includes a fund that invests in global equities, a fund that invests in European equities and a Finnish index fund. 
  • Additionally, Nordea offers Enhance funds, which include global, European, US and emerging market funds. The Enhance funds fall in between active and passive funds – they are affordable and their portfolio manager makes fewer investment decisions than the managers of actively managed funds. The Enhance funds, however, aim to outperform their benchmark index, unlike completely passive funds.
  • You can start saving in funds with as little as 10 euros. You can conclude a fund savings agreement in Netbank or Nordea Mobile and save in funds every month without having to pay subscription or trading fees.
  • Please note that subscriptions and redemptions in funds are always made at the net asset value of the fund calculated at the close of the day. If you make a transaction in the afternoon after the fund’s cut-off time, the transaction will be executed at the closing value of the next day. If you redeem your units in Nordea funds, the cash will usually be credited to your account after 2–3 days.
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ETFs offered by Nordea

  • 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 trade in ETFs through Nordea Investor or Nordea Netbank, for example. 
  • ETF trading takes place in a stock exchange, so before getting started, you will need a book-entry account and a trading service. You can start with a free-of-charge trading service, and Nordea does not charge anything on a book-entry account 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 the stock exchange trading brokerage fee, which is a maximum of 1% on small sums and as low as 0.06% for active traders. 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.
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Important information about fund saving

The information on this page is meant only to provide general product information and is not to be considered as advice. Please note that historical returns are not a guarantee of future returns. The value of your fund shares can both increase and decrease as a result of the market’s development, and you may not get back all the invested capital.

   

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