Tackling Sweden's ETF Market

February 27, 2014

While Sweden may not be synonymous with exchange traded funds, the country’s largest financial advisor and product provider, Söderberg & Partners, is tweaking its business model to give its ETF exposure a boost.

The financial advisor has assets under management of €4.7 billion in its fund of funds, of which €600 million, or 12.7 percent, is in ETFs, and it is now in the process of moving the ETFs its uses from being listed in the U.S. to those listed in Europe.

Since Luxembourg does not have a double taxation treaty with the US as Sweden has, it will be more beneficial to use European listed ETFs rather than US listed from a tax perspective and means that the ETFs Söderberg & Partners’ invests in will be open to the UCITS stamp and the European investor market.

However, the Swedish market is no longer in its nascent stages. It has been around since 2000 when the region’s ETF provider, Xact, listed the first ETF, the Xact OMXS30, in 2000. Since then the ETF market in Sweden alone has grown to €3.23 billion of assets under management, while the Xact OMXS30 has become the largest ETF in the region when measured by assets.

Similarly, Sweden’s trading platform NordNet shows exchange traded product holdings, which includes ETFs and exchange traded notes are also doing well in the Nordic region. They hit €330 million in January, while total ETP trading turnover was €398 million, comprising €205 million in ETFs.

This month, the European Commission reported that Swedish gross domestic product will grow 2.5 percent and 3.3 percent next year, making it the fastest growing country in the Nordic region.

But Sweden still has a few issues to overcome before it starts to see growth rivalling that of the ETF market in the UK, The Netherlands, France and Germany.

While Sweden is a member of the EU it does not use the euro and continues to use the Krona, which means that it does not get the same currency benefits as other countries using the euro. Most ETFs listed in Europe are in euros, dollar or sterling, meaning that converting everything to these denominations can be costly and a slight disadvantage.

Rebecca Hampson, ETF.com’s European editor, talks to Magnus Embrink, portfolio manager at Söderberg & Partners on the Swedish market, the European view and how they are working on attracting more investors to the ETF market.

 

ETF.com: What is happening in the ETF side of the business?

Magnus Embrink: Recently we switched the majority of our ETF holdings from U.S. domiciled to UCITS funds as we are making our fund-of-funds UCITS compliant. We have long-term experience in managing fund-of-funds that hold mutual funds and ETFs. Our total AUM is €4.7 billion, with approximately €600 million invested in ETFs.

 

ETF.com: Was it difficult to switch your ETFs?

ME: We did rigorous research on potential European ETFs to use and on trading implementation to make sure that we would minimise the impact cost as much as possible.

The switches we did between ETFs that track the same underlying index, such as our SPY ETF, were very straightforward as we didn’t need to trade the underlying shares. But for our emerging market exposure for example, we had to buy all the underlying shares as the U.S. listed ETF tracked a different index than the European listed ETF.

Even though we traded quite large sizes, liquidity was never a problem.

 

ETF.com: Is there much interest for ETFs in Sweden?

ME: That depends on how you look at it. Among institutional investors; pension funds, insurance companies and fund-of-funds are frequent users of ETFs. There is also an uptick in interest in the private banking sector as a potential ban on retrocession might favour the use of ETFs.

Retail investors typically trade Swedish based XACT’s range of ETFs, but they are still quite inexperienced when it comes to a global usage of exchange traded funds. There is still much work to be done educating both investors and financial advisors and making ETFs more accessible.

 

ETF.com: Is this a big hindrance to retail uptake?

ME: Yes, there is a lack of knowledge since no one really educates retail investors as there is no incentive to do so. Swedish banks for example are more likely to promote their own actively managed mutual funds and investors in general have a limited electronic access to exchanges outside the Nordics, where the majority of ETFs are traded.

 

ETF.com: What are the benefits of ETFs then?

ME: ETFs are transparent and you always know what you own. Intraday and short term, they offer better diversification than trading individual stocks, still being as liquid as the underlying.  New entrants and increased competition have pushed costs lower which makes ETFs even more attractive as core, long-term holdings. Compared to mutual funds, ETFs offer a much wider range of investment opportunities in terms of single countries, sectors and different styles such as growth, value and size.

From our business position, if we want to increase or decrease the equity exposure in our portfolios we use mainly ETFs. It is cost efficient and cost transparent, and we can quickly get exposure to a certain market. Also we don’t have to worry about any additional fees that may occur when redeeming shares from a mutual fund.

 

ETF.com: What does the future look like for the ETF market in Sweden?

ME: Retail investors have yet to embrace ETFs. The lack of incentives to educate investors and insufficient access to electronic platforms has prevented the asset class from growing as rapidly as it deserves to. Swedes are in general heavily invested in the domestic equity market, if that trend reverses somewhat, then ETFs probably has the best offering when it comes to foreign equity exposure. Also, as ETFs are cheap to own, the ongoing debate on mutual funds expenses might attract new investors.

For institutional investors, ETFs might get more attractive as regulatory forces make the use of derivatives and swaps more costly. This could be very beneficial for ETFs in the long run.

 

ETF.com: The biggest challenge?

ME: Traditionally, Swedish investors have favoured actively managed funds to a large extent. But now, there is definitely a trend towards an increased interest in index investing. The absolute majority of the flows is being captured by index funds. Therefore, a big challenge is to educate investors so that they are aware of all the benefits ETFs has to offer and make them more accessible.

 

 

 

 

 

 

 

 

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