WHAT IS AN ETF?

An ETF (Exchange Traded Fund) is a fund, of which you can buy and sell units on the stock exchange like any common stock. ETF:s are often passively managed funds, which follow a specific index. There are also actively managed ETF:s available on the market.

The passive ETF:s combine the benefits of passive index investing and investing in mutual funds as well as the easiness of trading real-time on the stock exchange. The investor receives a diversified stock portfolio consisting of the shares in the index with one trade.

The first listed ETF (S&P 500 –index fund) was launched in the USA in 1993. In Finland, the first ETF started in february 2002, when the Helsinki Stock Exchange launched the OMXH25 ETF together with Seligson & Co Fund Management. The popularity of ETF:s has grown explosively during the past few years. In the year 2006 there were almost 700 different ETF:s around the world with more than 500 billion USD in total assets.

The investment policy for the Seligson & Co OMXH25 ETF is to track the return of the OMX Helsinki 25 Stock Index, and thus offer investors a simple and cost-effective way to invest in a diversified Finnish stock portfolio consisting of the 25 most liquid stocks on the Helsinki Stock Exchange.

ETF:S IN GENERAL

• It is possible to buy and sell ETF:s any time during the exchange opening hours. The unit price develops in real-time just like the price of a stock.
  
  The management fee for ETF:s are usually lower than the fee in normal funds. ETF:s following a passive strategy normally have a management fee of 0,10 % - 0,50 %. However, there are a lot of expensive ETF:s around the world, and it is therefore important to have a close look at the different costs also when investing in ETF:s. Besides management fees, there are a lot of other costs related to the fund, which vary eg. depending on the registration country.

• No subscription or redemption costs are charged when investing in ETF:s, However, the investor pays a fee to the broker for each purchase or sale of ETF units. Also, the spread between the buy and sell prices can be very wide. The safe-keeping of ETF units can also involve costs and when trading foreign ETF:s, costs like currency exchange costs, different treatment of dividend tax a.s.o. must be considered as well.

• The ETF units are mainly distribution units, i.e. the dividends that the fund receives are paid out as income to investors. The distributions are taxable income for Finnish investors. Please check your own tax status with a local tax expert.

Back