Exchange-Traded Product (ETP)
A financial product that is publicly traded like a bond in the stock market
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What is an Exchange-Traded Product (ETP)?
An exchange-traded product (ETP) refers to a financial product that is publicly traded like a bond in the stock market. ETPs offer a cost-effective and safe way to diversify an investment portfolio by acquiring exposure to an index or asset class. They are passive investments, with typically lower fees than index funds and active mutual funds, making ETPs an easy entry for investors to get exposed to a wide variety of assets.
Originally, exchange-traded products merged the cost-effective, benchmark approach of the stock index funds with the securities’ intraday marketability. As the markets evolved, ETPs now cover exposure to a growing number of asset groups.
Today, along with offering replication of a stock index, ETPs also allow investors to diversify their investments by providing exposure to asset classes that were historically difficult to reach.
Summary
- An exchange-traded product (ETP) refers to a financial product that is publicly traded like a bond in the stock market.
- Exchange-traded products also let investors diversify their investments and buy and sell like shares.
- ETPs are designed to resemble an underlying index or asset’s return, with convenient share tradability and access.
Types of Exchange-Traded Products
1. Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are investment funds that trade as a single security on the stock exchange. Since the introduction of ETFs in 1993, they’ve expanded significantly in terms of range and variety.
Usually, an ETF tracks an index fund, such as the S&P 500, but it can also follow a market, commodity, industry, or even a currency. The price of an exchange-traded fund will increase and decrease, much like most investments. The ETFs trade all through the day in the same way a stock trades.
2. Exchange-Traded Commodities (ETCs)
Exchange-traded commodities (ETCs) are debt instruments that do not come with interest payments. They are designed to provide access to an individual product or a basket of items. The ETC framework is often used to provide investors with significant exposure to currencies, either as individual currency pairs or as a currency basket.
3. Exchange-Traded Notes (ETNs)
Similar to ETCs, exchange-traded notes (ETNs)are debt securities that do not pay interest. These are only intended to track the return on the related asset or index. However, the issuing entity of both is different.
While Special Purpose Vehicles (SPVs) with segregated reserves issue ETCs, ETNs are usually issued by banks, do not hold any assets, and are unsecured. Although the yields of ETNs correspond to the underlying index or asset, they are identical to unsecured and classified bonds.
Characteristics of an Exchange-Traded Product
1. Passive investment
Exchange-traded products are a transparent and cost-effective way to get exposed to an asset class, as maintenance fees are usually smaller than the index funds or active mutual funds.
2. Tracks an underlying asset
An exchange-traded product seeks to provide the same yield as the underlying index or asset, providing a diversified investment in a single transaction.
3. Listed on the exchange
The performance of the investment in ETPs is accessible on an intraday basis through the accessibility of live prices.
4. Liquid asset
An exchange-traded product (ETP) is a liquid asset backed by a pool of market makers and approved members.
5. Trades like shares
ETPs are designed to resemble an underlying index or return of an asset, with convenient trading and access. They are just as easy to buy and sell as the shares; at any moment, the market is available.
Reasons to Use an Exchange-Traded Product
1. Flexible
Exchange-traded products can provide investors with access to an alternate asset class or a whole index with a single transaction.
2. Accessible
ETPs may be acquired and exchanged while the stock exchange is open, as prices are quoted throughout the day.
3. Cost-effective
They offer a cost-effective way to diversify by benchmarking or getting exposed to investments that were historically inaccessible.
4. Transparent
Unlike some investment instruments, exchange-traded products are released regularly. The visibility makes it easy for investors to see just what they own.
5. Simple
ETPs are financial instruments listed and exchanged in the same manner as shares across the same exchanges and platforms.
Additional Resources
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
