News and Insights

Simple and easy to trade – ETFs are increasingly popular

Credit Suisse Asset Management is adding exchange-traded funds to its range. They will supplement the existing Credit Suisse index funds and are set to play an increasingly significant role due to ongoing digitalization.

Exchange-traded funds (ETFs) are in demand. Few other investment products have seen such growth in popularity in recent years among both individual and institutional investors. So what is their recipe for success? They are simple, transparent, and generally low cost, and can be bought and sold at any time during the exchange trading day (intraday) thanks to a liquid secondary market. Their high level of trading liquidity also makes ETFs a favorite of fintech companies and robo advisors, whose buy and sell orders provide a further boost to liquidity.

After withdrawing from the ETF business some years ago, Credit Suisse Asset Management has now made the comeback that many investors were calling for – a return that has not gone unnoticed. ETFs supplement the range of index funds, which comprise more than 90 products with an overall volume in excess of CHF 132 bn (as at December 31, 2019).

It’s a logical step for us to extend our range of funds. Through our core index funds business we have the critical mass, the technology, and the expertise to offer our clients a first-class service covering all aspects of ETFs,

explains Dr. Valerio Schmitz-Esser, Head of Index Solutions at Credit Suisse Asset Management.

However, the rise of ETFs should not conceal the fact that, according to data from Morningstar, index funds still account for more than half of the passive investment volume in Europe. Market observers expect index funds to grow faster than ETFs over the coming years, with Credit Suisse Asset Management benefiting disproportionately as the leading provider of index funds in Switzerland and one of the largest providers in Europe.

Parallels and differences

Like index funds, which are traded on a daily basis at net asset value (NAV), ETFs pursue a passive investment approach, replicating a benchmark index as accurately and cost-effectively as possible. The performance of both fund types is closely aligned with that of their index, setting them apart from actively managed funds, which may diverge significantly from their benchmark. Shares in ETFs can be bought and sold at any time during exchange trading hours, giving investors additional flexibility. The price of an ETF corresponds to the bid or ask price plus the broker’s commission. The spread between the buy and sell price depends on the trading volume. Their high trading frequency means ETFs can be used to exploit tactical opportunities.

An index fund is subscribed and redeemed at net asset value (NAV). The NAV is calculated on the basis of closing prices, to which a small dilution levy is added to cover the transaction costs and protect existing investors against their shares being diluted. Index funds are suitable for establishing a strategic position in a selected market segment, for example.

Full replication is the aim

There are essentially two investment approaches – full and optimized replication. The ETFs on the Swiss Market Index (SMI) or the MSCI Europe fully replicate these indices. This means that the funds hold all the stocks included in the index, with the same weightings. Apart from a few secondliners, the ETFs on the Swiss Performance Index (SPI) or the MSCI Emerging Markets also hold all the stocks that make up the corresponding index. By contrast, the bond funds replicate their benchmark indices by means of optimized sampling.

Index funds and ETFs compared

Similarities
Both types of fund pursue a passive investment strategy and aim to replicate the benchmark index as accurately as possible while keeping costs and deviations from index performance to a minimum. Both funds replicate their benchmarks physically. The minimum investment is one share.
Differences    
  Index funds ETFs
Liquidity Daily Intraday trading
Investment suitability Long-term strategy Tactical allocation
Trading price NAV plus or minus dilution levy* Bid or ask price at the time the trade is carried out, plus broker commission
Minimum investment 1 share 1 share
Stamp duty

Fund under Swiss law: subscriptions and redemptions of shares are exempt from stamp duty.

Fund under Luxembourg law: stamp duty of 0.15% is only levied on subscription amount.

ETFs under Irish law: stamp duty of 0.15% is levied on all transactions.

* Subscription and/or redemption spread to compensate for transaction costs in the fund incurred as a result of subscriptions and redemptions.

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