Exchange-Traded Products (ETPs) are financial instruments that track underlying securities, indexes, or other financial products. They trade on exchanges similar to stocks, meaning shares can be bought and sold throughout the trading day. The prices of ETP shares are derived from the underlying investments they track.
ETPs can be benchmarked to various investments, including commodities, currencies, stocks, and bonds. They can contain a few or hundreds of underlying investments. The main types of ETPs include Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange-Traded Commodities (ETCs).
Types of ETPs: ETFs, ETNs, and ETCs
Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds but trade like stocks on an exchange. An ETF contains a basket of investments, including stocks, bonds, or commodities. Typically, ETFs track an underlying index such as the S&P 500, but they can also follow specific industries, sectors, or even currencies.
Some Popular ETFs:
- SPDR S&P 500 ETF Trust (SPY): Tracks the S&P 500 Index.
- iShares MSCI Emerging Markets ETF (EEM): Tracks the MSCI Emerging Markets Index.
- Vanguard FTSE 100 ETF (VUKE): Tracks the FTSE 100 Index.
Advantages and Disadvantages of ETFs:
- Advantages: Low cost, liquidity, diversification, intraday trading.
- Disadvantages: Can have tracking errors, management fees, and can be affected by market volatility.
Do you want to know more about ETFs? We recommend you read the following guide: What is an ETF, and how does it work?
Exchange-Traded Notes (ETNs)
ETNs are debt securities issued by financial institutions that promise to pay a return linked to the performance of a specific index or asset. Unlike ETFs, ETNs do not hold the underlying assets. Instead, their value is based on the issuer’s creditworthiness.
Examples of Popular ETNs:
- iPath Bloomberg Commodity Index Total Return ETN (DJP): Tracks the Bloomberg Commodity Index.
- iPath S&P 500 VIX Short-Term Futures ETN (VXX): Tracks the S&P 500 VIX Short-Term Futures Index.
- UBS AG FI Enhanced Global High Yield ETN (FIHD): Tracks the performance of high-yield bonds.
Advantages and Disadvantages of ETNs:
- Advantages: Tax efficiency, access to hard-to-reach markets, no tracking error.
- Disadvantages: Credit risk from the issuer, no periodic interest payments.
Exchange-Traded Commodities (ETCs)
ETCs provide exposure to commodity prices and can be structured as either ETFs or ETNs. They allow investors to gain exposure to commodities like precious metals, agricultural products, and energy resources without owning the physical commodities.
Examples of Popular ETCs:
- SPDR Gold Shares (GLD): Tracks the price of gold.
- iShares Silver Trust (SLV): Tracks the price of silver.
- United States Oil Fund (USO): Tracks the price of crude oil.
Advantages and Disadvantages of ETCs:
- Advantages: Direct exposure to commodities, diversification, traded on major exchanges.
- Disadvantages: Can be affected by commodity price volatility, potential for credit risk in synthetic ETCs.
Advantages and Disadvantages of Investing in ETPs
Advantages
- Diversification: ETPs offer exposure to a broad range of assets, reducing specific risk.
- Liquidity: ETPs can be bought and sold throughout the trading day at market prices.
- Transparency: Holdings of ETPs are typically disclosed daily.
- Cost Efficiency: Many ETPs, especially ETFs, have low expense ratios.
Disadvantages
- Market Risk: ETPs are subject to market fluctuations and can lose value.
- Tracking Errors: Some ETPs may not perfectly track their underlying index.
- Credit Risk: ETNs carry the risk of the issuer defaulting.
Comparison Between ETFs, ETNs, and ETCs
In the following table, we summarize the main differences of ETPs:
| ETPs | ETFs | ETNs | ETCs |
|---|---|---|---|
| Structure | Fund holding underlying assets | Unsecured debt security | Can be structured as ETFs or ETNs |
| Underlying Assets | Stocks, bonds, commodities | Index, asset, or strategy-linked debt | Commodities or commodity futures |
| Credit Risk | No | Yes (issuer risk) | Yes (if structured as ETNs) |
| Dividend Payments | Yes | No | No (depends on structure) |
| Tracking Error | Possible | None | Possible |
| Tax Efficiency | Moderate | High | Moderate |
| Trading | Intraday on exchanges | Intraday on exchanges | Intraday on exchanges |
| Examples | SPDR S&P 500 ETF (SPY), Vanguard FTSE 100 | iPath S&P 500 VIX ETN (VXX), UBS AG ETN | SPDR Gold Shares (GLD), iShares Silver Trust (SLV) |
Where and How to Acquire ETPs in the UK
In the UK, ETPs can be acquired through various brokers and trading platforms. Here are some popular options to invest in UK:
eToro:
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Interactive Brokers:
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IG Group:
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Trading 212
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Related content
FAQ: Frequently Asked Questions about Exchange-Traded Products (ETPs)
ETPs are financial instruments that track underlying securities, an index, or other financial products. They trade on exchanges like stocks, allowing for intraday buying and selling. Examples include Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange-Traded Commodities (ETCs).
ETPs is a broad term encompassing all exchange-traded products, including ETFs. ETFs are a type of ETP that holds a basket of assets such as stocks, bonds, or commodities and trades on exchanges like a stock. Essentially, all ETFs are ETPs, but not all ETPs are ETFs.
ETPs offer diversification, liquidity, transparency, and cost efficiency. They allow investors to gain exposure to a wide range of assets and markets, often with lower fees than mutual funds.
Yes, ETPs are subject to market risk, tracking errors, and credit risk from the issuer in the case of ETNs. It’s important to understand these risks before investing.
ETPs trade on exchanges throughout the day, such as stocks, while mutual funds are traded only at the end of the trading day. ETPs often have lower expense ratios and offer more transparency regarding their holdings. See this article: ETFs Vs Mutual Funds
Physical ETFs hold the actual securities of the index they track, while synthetic ETFs use financial derivatives to replicate the performance. Physical ETFs have no counterparty risk, whereas synthetic ETFs may have credit risk from the swap counterparty.
You can monitor the performance of your ETPs through your brokerage platform, financial news websites, and tools provided by the issuers. Regularly review your investment goals and ensure that your ETP holdings align with your strategy.