Inexpensive, Fast and Transparent
Trading Funds via the Stock Exchange
Investing in investment funds are a popular choice in many depots. Investors used to have to buy these fund shares – via their own bank – from the capital investment company at a front-end load of up to 5 percent. The issuer publishes the price of a fund share once a day around midday. After that, open investors’ orders are executed. Investors can redeem their fund shares in the same way. Occasionally, they have to pay a redemption fee. Trading via the stock exchange offers an alternative.
Exchange trading of funds offers investors several advantages
- They do not have to pay the front-end load, which is usually higher than the cost of an exchange order. Thus, they achieve a higher yield compared with off-exchange trading.
- On the stock exchange, funds are tradable at any time between 9 a.m. and 8 p.m., via the issuer, they can do so only once a day.
- Moreover, investors know the price at which they can sell or buy a fund, since specialists are publishing estimates on a continuous basis and in real-time.
- In fund trading, investors can use all prevalent order types, including limit and stop orders as well as determine the validity.
- Investors do not have to open a separate depot with the capital investment company, which makes it easier to manage their investments.
- Furthermore, they are not restricted to the fund offering of their bank and, thus, have access to a broader range of products.
- Finally, the stock exchange offers monitored trading and a toll-free hotline for investors.
- In practice, investors trade funds just like shares on the exchange. The transaction can be ordered from the depot bank, with Frankfurt being selected as the marketplace.
Fund trading on the Frankfurt Stock Exchange starts with around
3,100 securities, which are included in trading on the Open Market.
The funds are supported by specialists on the trading floor at the
usual trading hours from 9 a.m. until 8 p.m.
The specialists are assigned to calculate market-driven prices and ensure liquidity. They guarantee tradability, provide maximum spreads and avoid uneconomic partial execution.
Specifically, this means: each fund is supported by a specialist, who sets price estimates on a continuous basis in combination with a volume. With assistance of the limit-control system, the specialists monitor whether the investors’ orders can be matched with each other or with the specialist’s own account.
In order to calculate the price indications, the specialists take into account the current order book situation and the redemption value published once daily by the issuer. The fund price is not static, since the value of the included titles changes during their trading hours. Therefore, the specialists calculate the current value of the funds they support, which enables continuous trading of these funds. This how it works: each fund has a benchmark. By means of the historical correlation between fund and benchmark, it can be determined how the price of a fund reacts to the price development of its benchmark. Thus, the valid price of a fund can be deduced from the current price of its benchmark.
The specialists set their estimates on the basis of this price indication. They entered a commitment that prices are always set within the published estimate and that the spread always lies between a fixed limit. The maximum spread depends on the investment focus of a fund.
- For funds investing primarily in German or western European shares, this spread must not exceed 1.5 percent.
- For bond funds, the spread is no more than 1 percent.
- Money market funds must have a spread of no more than 0.5 percent.
- Funds investing primarily in non-European or eastern European shares or in specific sectors, property funds, mixed and other funds are subject to a different risk. Thus, the spread can be up to 2 percent.
In most cases, the specialists’ spreads do not even reach the maximum limit. Investors can identify the actual current spread in the bid-ask estimate in real-time.
In addition, the specialists publish a minimum offered volume. This indicates the order size that a offered price is at least valid for.
- For funds investing primarily in German or western European shares, as well as bond funds, money market funds, property funds, mixed funds and other funds, specialists set estimates for orders of at least €100,000.
- For funds investing primarily in non- or Eastern European shares or specific sectors, estimates are set for orders of at least €20,000.
- Of course, orders larger than the above are executed at the published estimates if the market situation allows it.
Two companies currently act as specialists in fund trading on the Frankfurt Stock Exchange: DBM (Deutsche Börsenmakler GmbH) and N.M. Fleischhacker.
Fund trading is not a novelty on the Frankfurt Stock Exchange: for
six years, funds have been listed in the Xetra Funds segment. It is
the leading marketplace for exchange-traded funds (ETFs) in Europe.
151 index funds are currently tradable here.
Xetra Funds are listed in the Regulated Market by their issuers. Trading is conducted via the electronic trading platform Xetra and supported by Designated Sponsors, who provide liquidity and are assigned by the issuer. In contrast, actively managed mutual funds are included in trading on the Open Market (Regulated Unofficial Market) on request by the specialists.
This does not really make a difference for investors. Both types of funds are tradable continuously, their prices are exchange prices and trading is monitored by Market Surveillance (HÜSt). ETFs enable passive index investments and are geared towards day traders and large institutional investors, while actively managed funds are particularly suitable for long-term investments.
When it comes to the distribution of the dividend, fund shares
bought via the Frankfurt Stock Exchange are treated just like fund
shares acquired directly from the issuer. Moreover, the fund shares
can be sold both via the exchange and to the capital investment
company, because the latter has a redemption obligation
irrespective of how the fund share was acquired.
Transactions via the Frankfurt exchange are executed via the common exchange systems in Germany. Clearstream takes care of settling the accounts of the various trading participants. Necessary depository transfers are handled by the respective banks themselves.