The European Fund and Asset Management Association (EFAMA) has sliced the exchange-traded product (ETP) landscape into three categories in an attempt to give investors a clearer understanding of the ecosystem.

In a report, entitled Demystifying ETPs: A simple guide for the European investors, EFAMA said there are three main types of ETPs; exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and exchange-traded notes (ETNs).

ETFs are defined as built around a collective investment scheme, more commonly known as a ‘fund’, predominantly of the UCITS-type.

Meanwhile, EFAMA defined ETNs 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 and ETCs as built around another debt instrument known as a certificate, albeit offering investors a narrow exposure to single commodities or commodity indices.

The report said these categories are primarily driven by the nature of the underlying instrument in terms of the structural set up, the risk management and finally European Union regulatory requirements.

EFAMA added the need to define the different types of ETPs has become more crucial as more investors turn to ETFs. The ETF landscape in Europe currently totals $1.1trn assets following over 20% annual growth rate since the Global Financial Crisis (GFC).

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Commenting on the classifications, Federico Cupelli, senior regulatory affairs adviser at EFAMA, said: “We believe that a greater understanding around different types of ETPs is needed. This is prompted by the all too frequent confusion between these products, as witnessed again earlier this year during the COVID-19-induced market corrections, as well as by retail investors’ growing interest in these products.”

“Underlying our effort is the belief that a better understanding by investors is worthwhile, not only to sustain further ETP demand growth in the future, but – more importantly – to assist investors in making better investment decisions once they are able to appreciate the differences between ETPs more intimately, especially from a risk and product complexity viewpoint.”

EFAMA’s report comes five months after a group of US ETF issuers including BlackRock and State Street Global Advisors (SSGA) called for clearer identification and categorisation of ETPs.

Unlike EFAMA, however, the coalition added a fourth category – exchange-traded instruments (ETIs) – which included products such as short and leveraged strategies.

This caused a backlash from some corners of the US ETF industry which argued the bigger players were looking for greater control of the market.

Short and leveraged ETPs have not been addressed specifically in EFAMA’s report and could be classified in all three of the ETP types depending on the underlying assets.