Introduction

Exchange-traded products (ETPs) are financial instruments that track underlying assets or indices and trade on stock exchanges, much like equities. 

Investors can buy and sell shares of ETPs throughout the trading day, with prices fluctuating based on market dynamics. 

One draw of ETPs is they provide exposure to a wide array of investments, from stocks and bonds to commodities and currencies. 

There are three main types of ETPs; exchange-traded funds (ETFs), exchange-traded notes (ETNs), and exchange-traded commodities (ETCs). Each type offers distinct features and caters to different investment strategies. 

ETFs

ETFs are the most recognised ETPs. They invest in a collection of securities – stocks or bonds – and often track a specific index like the S&P 500. While the majority track an index – and are considered passive – some ETFs some ETFs are actively managed and aim to outperform their benchmarks. 

ETFs come in various forms, including physically replicated ETFs, which own the assets directly, and synthetically replicated ETFs, which use derivatives to mimic asset performance, often reducing costs and tracking errors but introducing counterparty risk. 

ETNs

ETNs, on the other hand, are more akin to bonds. Typically issued by banks, these debt securities do not own underlying assets but promise to pay returns based on the performance of a specific index at maturity. 

However, they do not offer interim interest payments and their safety hinges on the issuer's creditworthiness which introduces added risk for investors. 

ETCs

ETCs allow investors to invest in commodities without dealing with the complexities of direct ownership or futures contracts. 

Some ETCs are physically backed, storing the actual commodity as collateral, offering an added layer of security but potentially increasing costs due to storage and management. 

Because ETPs are listed on exchange, they offer investors an extra layer of liquidity by trading on the secondary market. 

From a regulatory standpoint, the degree of investor protection and regulatory oversight varies across different types of ETPs. 

An ETP’s prospectus and related documents will include its investment objectives, investments, risks, fees and expenses and other important information. 

Final word

Overall, ETPs offer investors exposure to a wide spectrum of options, from broad market benchmarks to more specialised areas of the market including specific industries, countries or commodities. 

ETP glossary

• ETF: as built around a collective investment scheme, more commonly known as a “fund”, predominantly of the UCITS-type  

• ETC: as built around another debt instrument known as a certificate, albeit offering investors a narrow exposure to single commodities or commodity indices  

• ETN: as built around a zero-interest debt instrument intended to typically offer investors a narrow exposure to an underlying instrument or to a niche index  

Source: EFAMA