In the sudden rush of enthusiasm for exchange traded funds in Europe, Sweden is one of the first to have caught the bug. OM, the group which owns and operates the Stockholm Stock Exchange, plans to launch the country's first ETF this summer.

It will be a real-time index fund to be traded on a new fund market. OM originally hoped to be the first in Europe to launch an ETF - but was pipped to the post by the Deutsche Borse.

"We still aim to be one of the big participants in ETFs in Europe," says Gabriella Propper of OM's business development unit.

It is a good time to be launching index funds in Sweden, notwithstanding recent stock market turbulence. Mutual fund ownership in the country is high - as many as two out of three Swedish adults are investors in mutual funds.

The equity culture has really taken grip among Swedish retail investors in the last year, and tabloid newspapers devote endless articles and headlines to their latest share tips.

oreover, a sweeping reform of the Swedish pensions system means that later this year Swedes are going for the first time to have a say in how a small proportion of their contributions are invested.

Called XACT OMX, the new fund will be based on Sweden's OMX index, which reflects the performance of the 30 most-traded shares on the stock exchange. Units will be directly traded on an exchange just like equities and investors will pay their brokers commission in the normal way.

The fund will be managed passively by OM XACT, a wholly owned subsidiary of OM Group. This will entail a fund management fee, yet to be set but among the lowest in the market, according to group promises. Current fees for similar funds range from 0.2 per cent to 0.9 per cent.

There are two main attractions with ETFs, says Ms Propper. First investors get immediate diversification, as they would do with any mutual fund. The fund is made up of exactly the same shares as the OMX index, so it does not depend on an individual fund manager's choices.

Second, unlike other funds, investors get real-time pricing, so they can check the value of their funds at any time. The performance of XACT OMX can be followed on trading screens, text TV, the internet, or even your mobile phone.

The aim, in other words, is to combine the most attractive elements of mutual funds - diversification of risk, reduced spread, and low fees - with the advantages of equities through high liquidity and accessibility.

The fund will have two different markets - a secondary market and a primary one. Secondary market trading, involving relatively small trades, will not affect the size of the fund. In the primary market, however, larger investors will be able to trade units with the fund management company as a counterparty, which will issue or redeem units accordingly.

This coexistence of the primary and secondary markets seems complicated and it may prove confusing to investors initially.
s Propper believes that if the US example is anything to go by, the new fund will be attractive to both private investors and institutions.

Institutions are expected to be keen buyers, partly for the diversification possibilities, and partly because of the hedging possibilities with some of OM's futures and options contracts.

"We expect big interest among international institutions. They tend to be mainly interested in a broad range of Swedish blue chips, rather than small cap companies," says Ms Propper.

The first fund - the launch of which still requires consent from the Swedish Financial Supervisory Authority - is only the start.
The fund market will be open for the listing of other funds, and OM is already in talks with some potential participants.

Future funds could be based on sector indices, other national indices or pan European indices. "The fund management company can develop new funds to be listed on other exchanges or based on other indices," says Ms Propper.

There is certainly a lot to go for. ETFs now account for two-thirds of the daily volumes on the American Stock Exchange, which launched the first ETFs in the US stock market back in 1993.


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