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Trading NASDAQ 100 and S&P 500 indices

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Karl O.Strøm
1 Apr 2022 | 6 min read
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Index funds are well-liked by long-term investors, but did you know that indices are also popular with traders? And for good reason?

An equity index is, as is well known, a collection of shares that are to represent a certain group of companies. There can be many selection criteria, such as geography, size, sector or growth profile. The most well-known and popular, however, are the broad market indices that combine geography, stock market and market weight (size). The Oslo Stock Exchange has the benchmark index OSEBX, but also the somewhat narrower OBX index with the 25 largest companies. In Sweden, the corresponding OMXS30 is used, and Germany has its DAX which contains 40 shares.

Common to these market indices is that they always contain the largest and most traded shares in their market, and that the shares in the index are weighted by size. Large companies gain more weight than smaller companies, and if the price of one company rises more than the others in the index, it will also gain more weight. It is also common with regular adjustments of the indices, where the weakest companies are replaced by newcomers who are on the rise in size and trading volume.

This element of automatic self-adjustment is one of the things that makes the indices attractive to long-term investors. The adjustment ensures that the index always reflects the top companies in the relevant market. The fact that the index contains a wide range of companies provides good risk diversification, often called diversification. Index funds based on such indices are also usually cheap measured by management costs. This is because the management is largely automated. This is simply a robot job.

Most well-known is the broad US S&P 500 index (SPX), which consists of 500 companies listed on the US stock exchanges. Size (market weight), daily trading (liquidity) and profitability are the main requirements for the composition of the index. Almost as well known is the NASDAQ 100 Index (NDX), which lists the 100 largest companies on the NASDAQ stock exchange in the United States. There is a significant overlap between these two indices, but NASDAQ has a higher share of technology companies. This means that it fluctuates slightly more than the S&P 500. Good years have often given a stronger rise in NDX than SPX, while declines have also been stronger.

The key to cheap index funds is liquid index products

SPX and NDX are among the indices on which most index funds are based, and also where these funds are usually the cheapest measured in annual management costs. The reason why the management costs for such funds can be kept so low is mainly that there are very liquid instruments available to trade the index itself, so-called index futures. This makes it easier for managers to offer their products, and to handle money in and out of investors every day. A lot can be automated. When it is possible for managers to keep costs down, competition ensures that this advantage flows on to investors. These are good things.


Futures on stock indices are, like their "siblings" and historical predecessors, futures on commodities, a form of standardized financial contracts. Commodity futures usually have a physical underlying, and are simply a contract for future delivery. Oil, aluminum, copper, wheat, soy and the like are among the most famous such futures. In contrast, futures with equity indices as underlying are a purely financial product, with daily cash settlement. Index futures are among the world's most traded financial products, but it is largely a market reserved for professional players. Banks, managers, brokerages, market makers, robot traders, hedge funds and larger professional traders dominate trading in index futures, with the S&P 500 and NASDAQ 100 as the most popular. These are sold for hundreds of billions of kroner every day.


On a daily basis, I manage a hedge fund through the fund’s management company. The fund trades daily in futures based on both stock indices and commodities. By far the most activity we have had so far in NASDAQ 100 futures. I know them well, and like to shop in them both long and short. The fund also closely follows several of the individual companies the index consists of, such as the tech giants Tesla, Apple, Microsoft, Amazon, Google, AMD and Nvidia.


However, direct trading in index futures is reserved for professionals. The instruments are considered complex products, you must have a permit / approval to trade them, and the minimum trading amount is large. One (1) contract on NASDAQ 100 futures currently has a value of approx. 2.5 million kroner. At the time of writing, the corresponding value of an S&P 500 contract is also approx. 2 million. However, those who buy the product must not pay this entire amount at once, but only provide a security equivalent to a margin of approx. 10-20%. This means that professionals can quickly have significant leverage on their positions. In sum, these trading conditions are practical for larger players, but make trading in futures unsuitable for most private traders. Very few Nordic brokerage houses also offer trading in US-listed futures, so you have to go to the major international players to gain access. Again, something that is complicated and not very useful for most private traders.


The good news is that there are solutions to this, and now it has become even easier to trade the US indices from Norway as well.

Index products for traders

What most private traders will prefer is that some offer understandable and easily accessible securities that can be traded at a reasonable cost through Norwegian online brokers, and preferably in NOK. There have been and are some players who offer some such products. New this year is that the global (originally Swiss) player Vontobel is coming to the Norwegian market with its products. Vontobel has long been a well-known provider of trading products in Sweden, and now some of the most popular variants are also released in Norway.

Index products on the NASDAQ 100 and S&P 500 are among the products currently available. The product range makes it possible to position both for rise (bull / long) and decline (bear / short). Both directions are available with different degrees of leverage (built-in leverage). The higher the leverage, the more risk is associated with owning the product. Both gains and losses can come quickly. It is therefore very important to familiarize yourself well with how these products work before you buy them, and to use them correctly. 

However, some things are good to have in mind:

  • Exposure - What these products indirectly provide exposure to is the price development of NASDAQ 100 and S&P 500 futures, and in addition the price in NOK will fluctuate with the development of USD / NOK. The futures themselves are very liquid and often fluctuate significantly even before the US stock exchanges open. It is therefore a Market Maker that can offer trading in these also for larger orders.
  • Liquidity / turnover - Although the individual product you see in Norway may have been little traded, or not traded on the day in question, there is a lot of trading in the underlying (futures). You therefore trade at real prices.
  • Costs - The difference between the buy and sell price (spread) is what the Market Maker benefits from. The difference reflects both the spread between the bid and ask prices in the underlying futures, but also the spread and cost of dealing with the currency. Underlying is traded in USD, while you buy and sell in NOK.
  • Market direction - If you buy a bull / long, you position yourself for growth. If you buy a bear / short, you are positioned for decline.
  • Leverage - The leverage indicates how strongly exposed you are. 3X is 3 times the underlying performance. If you bought for NOK 10,000, your equity will fluctuate as if you had bought for NOK 30,000. Normally for professionals who trade directly in futures is to ask approx. 10-12% margin, which can be compared to 8-10x leverage. The higher the leverage, the higher the risk. Possibly the higher the leverage, the less mail you can have for the same exposure.

Such products are designed for short-term trading, and to trade on one trend movement at a time in the underlying. If you are looking to own an exposure to the broad US indices in the long term, it is better to choose a regular fund, or an ETF or tracker product. US funds are available in Norway, but are known to be traded only once a day and at an unknown price. ETFs that follow these indices are listed in the United States and in some other markets. No one is listed in Norway.

In addition to knowing the products, the most important thing is of course to have a good strategy for how to trade. The size of the item in relation to available capital, as well as your rules for when and how you go in and out will be decisive for the risk and the result.

There is no final decision in trading, nor is there a guaranteed path to success. It is important to have a conscious strategy, measure their results, and work for continuous improvement. Many traders like to trade individual stocks, and look at the indices mostly to get an indication of the mood in the market. Personally, I prefer it the other way around, by focusing on the indices and having individual stocks next to it.

Vontobel got in touch because it was known that I traded a lot in international indices and stocks. There are several traders and hedge fund managers who write posts on their blog in other markets, and they asked if I was interested in writing any posts for those here in Norway. It was my interest in trading that led me to write the book "Paleo Trading: How to trade like a Hunter-Gatherer", and to launch the hedge fund I am currently managing. I want to emphasize that none of what I write on this blog is to be regarded as personal advice or in any other way any call to action. Everyone must be responsible for their own decisions, and familiarize themselves well with the products they use. There is a lot of info available.

But that there are more choices for traders, yes that is a good thing.

Risks

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.

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Please read this information before continuing, as products and services contained on this website are not accessible to certain persons. Of importance are the respective prospectuses which are attainable from the issuer: Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, DE-60323 Frankfurt am Main, Germany, as well as from this website.