What Are Exchange-Traded Products?

  • Nov 25, 2018 AEDT
  • Team Kalkine
What Are Exchange-Traded Products?

Understanding ETPs: Exchange-traded products (ETPs) are financial products that are derivatively priced and are traded on an exchange throughout the day. Now why are these derivatively priced – as these securities have an exposure to other securities (like stocks) or other basket of assets, currencies, commodities, bonds etc. and derive their value from such other instruments. Therefore, an investor can access a wide range of assets through ETPs; and these products (as they themselves are not like bonds or shares) track the performance of a specified index or benchmark (such as the S&P/ASX 500 index) or track a currency such as the USD or a commodity like gold. ETPs are generally open-ended, which reflect that the number of units on issue is not fixed and the investor can any time invest in or can exit it. The price of these products keeps on changing during the day and this is the difference between ETPs and mutual funds. Further, demand and supply scenario posed by investors regulate ETPs and these can then trade at or near the respective net asset values (NAV).

Different types of ETPs: There are three general categories of exchange traded products - ETFs, Synthetic ETFs and other types of ETPs. The first one is the Exchange traded fund (ETF), which is a type of a managed fund that owns the underlying asset but has more flexibility as it usually has a lower fee than a traditional managed fund. An ordinary ETF is considered to be a passive investment, as there is no direct investment in any asset etc., rather the ETF tracks an asset or a market index (for example, ASX 500). Moreover, ETFs generally perform above the market and go along with the index they are tracking. When investing in an active ETF, the fund managers look for outperforming the market or the reference index and achieve investment targets as planned. The second type of ETPs entail Synthetic ETFs (as there is no physical holding of securities) and these represent managed investments that can be bought or sold like shares. Then the third ETPs entail other exchange traded products including structured products, exchange traded hedge funds etc.. Sometimes, ETPs also entail notes/ certificates and other vehicles.

ETPs are traded on two exchanges in Australia: The exchange traded products can either be listed on the ASX market or may be on the AQUA market that runs on specifically designed rules; and the products that are traded on the AQUA market are generally issued by a third party. Thus, the latter ones allow investors to have exposure to the underlying assets, without actually possessing those assets. In a way, issuers need not have a direct control over such assets while the performance of the fund is still associated with performance of underlying assets. The AQUA exchange market typically offers the trading of ETPs at their net asset value (NAV). It is to be understood that similar products listed on the ASX may not comply with the listing requirements of AQUA market. In general, ETPs procedure for trading, clearing and settlement is the same as the procedure for dealing in shares on the ASX. At the moment, investors can access over 100 ETPs through the ASX platform.

While some investors may find growth through investing in ETPs based on the portfolio they chart out, the investment strategy still needs to consider the risks, investment objectives etc. as highlighted in the ETPs’ product disclosure statements accompanied by a financial advice (as appropriate).


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