Trading in ETFs
Exchange traded funds (ETFs) offer the opportunity to invest in a fund that tracks a stock index, for example the OBX index. ETFs can also track different asset classes, such as shares, commodities or currencies, or a basket of underlying asset classes. Risk will vary depending on which asset classes the ETF is linked to, and on the degree to which its investments are leveraged. Management costs are lower for ETFs than for traditional mutual funds, and trading in and out of a position is as easy and inexpensive as trading a common stock, with real-time execution and prices.
ETFs and the composition of the fund
ETFs seek to replicate the return on underlying instruments, either by taking direct positions in the underlying instrument or by investing in financial instruments like derivatives to get the desired exposure. These financial instruments used must be subject to fair and reliable pricing on the Oslo Børs marketplace, or on some other stock exchange or regulated marketplace.
Leverage
Some ETFs use leverage, which means that the fund's investment exposure can magnify movements in the underlying index, for example by 200%. In addition to offering investments in the funds that track the movements in an underlying index (Bull funds), some funds offer investments in units that return the inverse of the movements in the index (Bear funds).
In general, one should avoid taking long-term positions in leveraged products. This type of ETF is typically rebalanced on a daily basis, which may mean that volatility can have an adverse effect on the investment return over longer time periodes.
Investing in ETFs offers a number of advantages:
- A liquid investment offering exposure to an index or commodity
- ETF units are traded at market prices throughout the day
- The benefits of risk diversification by investing in a fund, combined with the trading opportunities of investing in shares, all in a single transaction
- Leveraged funds offer opportunities for both short-term speculation and hedging
- Opportunity to "short" the market (selling a position you do not own) without having to trade in individual shares and without having to borrow the underlying shares to be sold (Bear fund)
- Commodity-based ETFs offer exposure to commodities without the risks of physical delivery
Investing in securities funds always involves risk. The price of units may go down as well as up, and there can be no guarantee of the outcome from such an investment. Investors must make their own decisions on whether investing in an ETF is an appropriate investment in relation to their personal financial situation, the period for which they intend to invest and the level of risk they are prepared to assume.
