What is an Exchange Traded Product (ETP)?

ETPs are a group of securities that are traded on stock exchanges in the same way that common stocks are, and they are traded intraday. ETPs are used to track a financial instrument, such as a stock market index, a currency, a commodity, or an interest rate. Exchange-traded funds (ETFs) are the most well-known ETPs (ETFs).

 

ETPs (exchange-traded products) are regularly priced securities that trade on a national stock exchange during the day. ETPs are exchange-traded funds that track underlying securities, financial instruments, or an index. 

 

ETPs are not the same as individual underlying securities like stocks and bonds. ETPs' prices fluctuate every day since they trade on stock exchanges like other stocks. Their prices, on the other hand, are frequently determined by the underlying investments that they track.

 

ETPs products have risen in size and popularity dramatically since 1993. The popularity of ETPs is largely due to their low-cost structure, which has taken the shine off higher-priced actively managed funds.

 

The majority of ETPs are structured as unit investment trusts (UITs) or exchange-traded funds (ETFs), with shares representing an interest in a portfolio of securities that follow an underlying benchmark or index. 

 

To achieve their objectives, ETPs typically either invest directly in the assets that underpin the benchmark, such as stocks, bonds, currencies, or commodities or use a representative sampling strategy that attempts to achieve similar performance to the benchmark without investing in all of the benchmark's underlying securities. 

 

To achieve their investment objectives, a number of ETPs use more sophisticated financial strategies and instruments such as leverage, futures, swaps, and/or derivatives to varying degrees. 

 

"Non-Traditional ETPs" is a term used to describe these ETPs. Traditional ETPs are more complicated than non-traditional ETPs, and therefore may not be suitable for all investors. Some ETNs, leveraged or inverted ETPs, actively-managed ETPs, futures-linked ETPs, volatility ETPs, and other products may fall into this category.

 

Also Read | Capital Investment

 

Types of Exchange-Traded Products

 

1. Exchange-Traded Commodities (ETCs)

 

ETCs (exchange-traded commodities) are debt securities without interest payments. They're made to give you access to a single product or a group of products. The ETC framework is frequently used to provide large currency exposure to investors, either as individual currency pairs or as a currency basket. ETCs, or exchange-traded commodities, make it simple to invest in individual commodities and precious metals.

 

The performance of an ETC is determined by a single commodity or a basket of commodities' spot price (price for current supply) or future price (price for future supply). 

 

Because the issuing corporation invests directly in commodity or commodity derivative contracts, the ETCs imitate the performance of a single commodity or commodity indices. In the latter case, ETCs allow investors to get exposure similar to that obtained by holding a long position in futures contracts without using leverage.

 

Unlike a futures position, ETCs do not require repositioning from one futures contract to another, no margin, and no brokerage/replacement charges of derivative contracts approaching maturity because these activities are already built into the instrument. Finally, physically-backed ETCs allow investors to avoid the costs and dangers associated with storing commodities.

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Three Types of ETFs

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2. Exchange-Traded Funds (ETFs)

 

ETFs (exchange-traded funds) are investment funds that trade on the stock exchange as a single security. ETFs have grown greatly in terms of range and variety since their launch in 1993.

 

An ETF often tracks an index fund, such as the S&P 500, although it can also track a market, commodity, industry, or currency. Like most assets, the price of an exchange-traded fund will rise and fall. ETFs trade in the same way that stocks do throughout the day. 

 

An exchange-traded fund (ETF) is a collection of equities that mirrors the composition of a stock market index, such as the Sensex or the Nifty. ETF prices are based on the net asset value of the stock basket in which it invests. It is comparable to mutual funds in many aspects. 

 

ETFs (Exchange Traded Funds) are index funds that are listed and traded on stock exchanges and are managed passively. ETFs track the appropriate index and duplicate its returns, whereas mutual funds strive to produce alpha by beating a market benchmark. To invest in ETFs, you'll need a stock broker's Demat and trading account.

 

3. Exchange-Traded Notes (ETNs)

 

Exchange-traded notes (ETNs), like ETCs, are debt securities that do not pay interest. These are solely meant to track the return on the asset or index in question. Both, however, have a separate issuing entity.

 

While ETCs are issued by Special Purpose Vehicles (SPVs) with segregated reserves, ETNs are typically issued by banks, have no assets, and are unsecured. ETN rates are identical to unsecured and classed bonds, notwithstanding the fact that they relate to the underlying index or asset. 

 

ETNs (exchange-traded notes) are unsecured debt issued by an underwriting bank and tied to the performance of a market benchmark, such as a stock index. ETNs are subject to two types of risk: standard market risk and the issuing bank's possible creditworthiness.

 

What is the difference between an ETF and an ETC?

 

You must get an ETC if you just wish to invest in commodities. Precious metals, industrial metals, oil, natural gas, soft commodities, and animals all have ETCs (exchange-traded commodities). ETCs, like ETFs, are traded on the stock exchange and offer the same benefits. 

 

However, there is a significant distinction: the capital invested in an ETC is not a fund asset that is safeguarded in the event of the issuer's collapse. ETC is a debenture issued by the ETC supplier. In the case of an ETC, as opposed to an ETF, the investor faces issuer risk. To mitigate this risk, issuers use a variety of collateralization techniques.

 

Mutual Funds vs. Exchange Traded Products

 

Exchange-traded products (ETPs) were created to provide investors with greater flexibility than mutual funds. Mutual funds are investment vehicles that are made up of a basket of securities that are funded by a group of investors and managed by professional money managers.

 

ETPs also require a brokerage account to trade, thus if it isn't one of the ETFs that the brokerage allows to be traded freely, buying and selling ETP shares may result in a brokerage commission. All of the big discount brokers offer commission-free trading on the majority of highly liquid ETPs. 

 

Differences in the bid and ask (buy and sell) prices may also increase the cost of trading ETPs. Some no-load or no-fee mutual funds, on the other hand, do not require a brokerage account and can be bought and sold without a trading commission.

 

At the end of the trading day, mutual funds are normally valued only once. ETPs are similar to stocks in that they can be bought and sold at any time of day, and their prices fluctuate. 

 

For example, an investor can use ETFs to place a purchase or sell order with a broker at a certain price. Unlike mutual funds, investors can buy an ETF in the morning and sell it at the end of the day. Expense ratios in ETPs are often lower than in mutual funds.

 

Also Read | Best Mutual Funds to Invest in

 

Exchange-Traded Product Characteristics
 

1. Investing in the Long Run

 

Because maintenance fees are typically lower than index funds or active mutual funds, exchange-traded products are a transparent and cost-effective approach to obtain exposure to an asset class.

 

 

2. Traded on a Stock Exchange

 

The performance of an ETP investment can be tracked intraday thanks to the availability of live prices.

 

 

3. Liquid asset

 

A liquid asset-backed by a pool of market makers and approved members is known as an exchange-traded product (ETP).

 

 

4. Follows the performance of an underlying asset

 

An exchange-traded product (ETP) aims to deliver the same yield as the underlying index or asset, allowing investors to diversify their portfolios in a single transaction.

 

 

5. Shares and Stock Trades

 

ETPs are designed to look like an underlying index or asset return, but with the added benefit of easy trading and access. They are just as easy to purchase and sell like stocks, and the market is open at all times.

 

Also Read | How Does Risk Management Benefit in Finance?

 

Passive or Non-Managed ETPs

 

ETPs that are passive or unmanaged aim to duplicate the performance of the index or benchmark they track. Leveraged ETPs aim to outperform the index or benchmark they monitor by a factor of ten. Inverse exchange-traded funds (ETPs) aim to outperform the index or benchmark they monitor.

 

The majority of leveraged and inverse ETPs reset daily, which means they are structured to meet their stated goal on a daily basis. When held for a longer period of time, their performance can deviate dramatically from the performance (or inverse of the performance) of the underlying index or benchmark. 

 

This could result in higher degrees of risk, such as market risk, volatility risk, liquidity risk, and positive and negative compounding risk, to name a few. In volatile markets, this effect might be amplified.

 

Futures-linked ETPs try to track a commodity, currency, or volatility index based on futures contracts. Futures contracts, swaps, forward contracts, and other derivatives may be held by these ETPs. 

 

They are not the same as investing in a physical commodity, currency, or volatility instrument directly. Their performance may not always match the price performance of the underlying investment due to their complex structure. Depending on market conditions and investing plans, this variation could be good or detrimental.

 

Also Read | Understanding Inverse ETFs

 

Different Types of ETP Investment Strategies

 

1. Some ETPs invest in and hold securities that are part of the index they track. Because the ETP buys the actual securities that make up the index it seeks to monitor, this approach is known as a physical investment strategy.

 

2. To track the price of the index, other ETPs use swaps, which are unusual transactions. The ETP and a counterparty (such as a bank) agree that the ETP will be paid the same amount as the index returns. 

 

3. A synthetic investing approach is what it's called. It is frequently less expensive than purchasing all of the securities in an index, and it is advantageous in less developed markets where shares are not always easily available for purchase and sale.

 

4. Some ETPs have security measures that may be useful if a relevant counterparty in the product structure fails to meet its payment commitments. In most cases, such security consists of a pool of assets (collateral) that can be sold if the relevant counterparty fails to pay.