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The Nordic ETF Market in Focus

With approximately EUR1.7 billion of assets under management, Sweden is the fifth largest ETF market in Europe, ahead of both Italy and Spain

Hortense Bioy, CFA 16 November, 2010 | 4:16PM

It has been ten years since the first exchange-traded fund was launched in the Nordics. XACT OMXS30 was listed on the Stockholm stock exchange on October 29th, 2000, offering exposure to the 30 largest Swedish equities as measured by market capitalisation. Since then, ETF turnover has increased hundredfold to over EUR22 billion last year and the number of offerings has multiplied.

XACT, which is owned by Handelsbanken, has added 18 funds to its product line-up, ranging from leveraged and inverse ETFs to sector ETFs. Also, new players have entered the marketplace, including Norway’s DnB NOR (DNBNOR), Sweden’s HQ Bank (HQ) and more recently Deutsche Bank (DBK) and UBS (UBSN).

Today the Nordic ETF market is fairly uneven because the ETF market within each country has developed at a different pace over the last 10 years. Sweden remains the biggest and most advanced market in the region with 63 listed ETFs. It has approximately EUR 1.7 billion of assets under management, making it the fifth largest ETF market in Europe, ahead of both Italy and Spain.

The ETF market in the rest of the region is still in its very early infancy, with only 6 ETFs listed in Norway and only one ETF listed in Finland. There are currently no ETFs listed in Denmark, mainly due to regulatory and tax issues. That said, investors across the region are accustomed to trading on foreign stock exchanges, especially the Fins who, in addition to buying single stocks on their local market, seem to be particularly keen buyers of delta one products on exchanges outside of Finland.

Investor Base
Much like the rest of Europe, the Nordic ETF investment scene is dominated by institutional investors who tend to trade over the counter (OTC) as opposed to on exchange. It is estimated that between 70% and 80% of ETF trading volume across the region takes place OTC, while the remaining 20% to 30% of ETF trading activity takes place either on local exchanges--especially the Stockholm Stock Exchange--or foreign exchanges such as Xetra, the London Stock Exchange and the SIX Swiss Exchange.

The retail ETF market is still very small, although it is growing as ETFs gain popularity. In fact, individual investors have become very active traders of leveraged and inverse funds within the region. In Sweden, private buyers and sellers of leveraged and inverse ETFs account for 60% of the daily trades and 40% of daily volume, according to Henrik Noren, managing director of XACT.

Individual investors in Sweden seem to have a good understanding of the main risks involved in these products. “They are sophisticated and not risk-averse,” commented Helena Wedin, sales director of Nordic Structured Products at NASDAQ OMX. Retail investors in Norway tend to have an even higher risk tolerance when it comes to investing in the stock market. This is partly because the Norwegian welfare system provides many safety nets, prompting investors to take on more risk within their self-directed portfolios.

In contrast, institutional investors generally take a more conservative long-term view. They are the biggest buyers of non-leveraged ETFs tracking the region’s largest indices, namely XACT OMXS30, XACT OMXSB and DnB NOR OBX. Institutional trades account for at least 80% of these funds’ transactions. Nordic institutional investors have also started to use ETFs as part of their tactical asset allocation to help access new markets quickly and cheaply. The emerging market equity category is one area where pension funds and insurance companies are particularly keen to use ETFs to test the water before launching active mandates.

Recent Developments and Foreign Competition
This year, the ETF market in Sweden has been fairly active with a series of new listings. Market leader XACT has launched eight new ETFs: XACT Nordic 120, which tracks the 120 largest and most traded Nordic companies, and seven sector ETFs following the largest listed Nordic companies within the bank & insurance, material, industrial, construction & real estate, energy, consumer goods and health care industries. Last month, XACT also launched the first commodity ETF on the Stockholm stock exchange. XACT Råvaror combines global exposure with a Nordic focus by tracking the development of the SHB Commodity Index (Excess Return). This index is designed to track the performance of a passive investment in a basket of the futures contracts for 15 commodities, including oil, electricity and paper pulp.

As demand increases for ETFs offering exposure to the Nordics, XACT plans to step up the pace of product development. Henrik Noren believes that there is room for more ETFs in the region, notably in the commodity and fixed income space. The Swedish provider will also consider the opportunity of cross-listing a few of its existing funds next year on the main European stock exchanges, namely the London Stock Exchange and Deutsche Borse.

Meanwhile, foreign issuers have started to show an interest in the Nordics; and more specifically in Sweden, because of its size and level of trading activity. Deutsche Bank was the first foreign ETF provider to break into the Swedish marketplace earlier this year with the cross-listing of 32 ETFs. The funds track indices such as the EURO STOXX 50, MSCI World, and MSCI Brazil, as well as short indices like the ShortDAX. UBS followed suit a few months later with the launch of 6 ETFs on the Stockholm stock exchange. The funds are also secondary-listings of products designed to track global and regional indices, including the MSCI Europe, MSCI USA and MSCI Japan.

UBS and Deutsche Bank are targeting retail investors, although the latter will also use its new local presence as a marketing tool for prospective institutional clients. If these new launches prove successful, both providers plan to increase their product ranges on the Stockholm stock exchange, but not necessarily across the region. Sweden remains their main focus. iShares has also been tipped by the Swedish press as another player that might soon enter the Swedish market. As each new entrant will try to capture the future growth of ETFs in the Nordics, competition amongst them promises to be fierce.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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