What are ETPs?

Find out more about Exchange Traded Products (ETPs).

Exchange Traded Products (ETPs) are types of investments that track underlying securities, an index, or other financial instruments. ETPs trade on exchanges similar to stocks, meaning their prices can fluctuate from day-to-day and intraday. However, the prices of ETPs are derived from the underlying investments that they track. ETPs can be used to invest in various asset classes such as bonds, equities (stocks), commodities or currencies.

Since prices of ETPs can vary, investors have the potential to earn gains but also have the risk of market losses. ETPs can contain a few or hundreds of underlying investments and they . ETPs are launched and managed by companies in the financial services sector. What are ETP shares? Investors can buy a certain number of shares of an ETP as a whole, depending on the amount of money to be invested.

Types of ETPs

Exchange Traded Funds (ETFs)

ETFs are probably the prevailing type of ETPs. They provide a certain level of protection to investors as they have the same legal status as authorised investment funds/mutual funds in many countries. An ETF’s assets do not appear on the balance sheet of the fund management company. In the event of a bankruptcy, these assets are legally segregated in favor of the investors. Like traditional investment funds, ETFs are not, as a rule, subject to the so-called issuer risk inherent in other forms of investment, such as bonds or structured products. Learn more about what is an ETF and how does it work in the dedicated article.

Exchange Traded Notes (ETNs)

ETNs (link to article What is an ETN?) are mostly senior, unsecured debt securities issued by a single bank and listed on the exchange. They are not asset-backed. The bank agrees to pay an index return, minus fees upon maturity. ETNs have two risk factors – ordinary market risk and the potential uncreditworthiness of the issuing bank.

Exchange Traded Commodities (ETCs)

ETCs are similar to ETFs – however, they track the performance of commodities markets, either using a physical/spot approach or futures contracts in order to achieve their objectives. A physical approach is not feasible for every commodity (e.g. agricultural products cannot be stored for years). Also, in some cases where storage is possible, its costs have to be weighed against the roll-over costs of futures contracts.

What are the general characteristics of an ETP?

  • Passive investment: ETPs are a transparent and cost-effective way to get exposed to an asset class, as fees are usually lower compared to active mutual funds.
  • Tracks an underlying asset: An ETP seeks to provide the same yield as the underlying index or asset, providing a diversified investment in a single transaction.
  • Listed on the exchange: The performance of the investment in ETPs is accessible on an intraday basis through the accessibility of live prices.
  • High liquidity: An ETP is a liquid asset backed by a pool of market makers and approved members.
  • Trades like stocks: ETPs are designed to resemble an underlying index or return of an asset with convenient trading and access. They are easy to buy and sell.

What are the benefits of an ETP?

  • Flexible: they can provide investors with access to an asset class or a whole index with a single transaction.
  • Accessible: they may be acquired and traded while the stock exchange is open, as prices are quoted throughout the day.
  • Cost-effective: they offer a low-cost way to diversify by tracking indices.
  • Transparent: The entire holdings of an ETP are published on the website of the issuer. This and the also published total expense ratio makes it easy for investors to see just what they own and what the costs are.
  • Simple: they are listed and traded in the same manner as stocks across the same exchanges and platforms.

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