An Exchange-Traded Product (ETP) is the term used to describe three different investment products:
- Exchange-Traded Funds;
- Exchange-Traded Commodities and;
- Exchange-Traded Notes.
ETPs comprise a basket of different types of assets (shares, bonds, commodities) that are pooled together within a single entity (or investment vehicle).
They are typically designed to track benchmarks like the FTSE 100 index for example.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds are probably the most well-known investment product within the ETP range.
ETFs provide investors with access to a range of asset classes such as equities (shares), property or fixed income (bonds).
These products enable investment across a number of stock markets, industrial sectors (such as Health Care or Energy) and even different investment strategies (based around risk profile for example).
The ETF that is probably most familiar to retail investors is one that tracks the performance of a specific stock market, like the FTSE 100 index.
The FTSE 100 tracker offers exposure to the UK’s 100 most valuable listed companies and investment managers such as BlackRock Asset Management provide investors with the opportunity to buy into this type of product.
ETFs can also track stock market indexes in other countries, such as the S&P 500 in the USA; or in a basket of shares in sectors such as technology, like the “Techie” ETF offered by the online investment platform, Wombat Invest.
Other ETFs include investments in fixed income products such as bonds. For example, JP Morgan has an investment product that aims to track the performance of the JP Morgan Emerging Markets Bond Index Global Core Index. This fund offers exposure to US Dollar denominated sovereign bonds from Emerging Markets countries.
One of the more attractive features of an ETF is that they must comply with the EU rules on how investment funds are operated. This is known as the UCITS Directive (see below) and it provides much greater protection to retail investors than other ETPs.
Exchange-Traded Commodities (ETCs)
ETCs are investment vehicles that invest in a range of different types of commodities, from precious metals such as gold or silver to energy resources like oil and gas.
The investment can be in a single physical commodity or an underlying commodity index. The aim is to replicate the price movement of the commodity or group of commodities.
For example, Invesco offers an ETC that seeks to track the performance of the London Gold Market Fixing Limited PM Fix Price. Each ETC is a certificate which is secured by gold bullion held in J.P. Morgan Chase Bank’s London vaults.
ETCs do not comply with the UCITS directive and therefore offer less protection to retail investors than ETFs.
Exchange-Traded Notes (ETNs)
ETNs invest in financial instruments that comprise secured or unsecured debt securities such as bonds issued by a bank or other financial institution.
The ability of the ETN to generate an investment return and repay ETN holders is contingent upon the underlying performance of the entity which issues the bond.
ETNs also seek to track the performance of an index or product by using complex financial techniques such as swap agreements.
ETNs do not comply with the UCITS directive and therefore offer less protection and more risk to retail investors than ETFs.
UCITS directive
UCITS stands for ‘undertakings for collective investment in transferable securities,’ and refers to a European directive that provides a regulatory framework for funds that are managed and domiciled in the European Union (EU) and intended for sale to retail clients.
The legislation underpinning this directive is quite comprehensive but there are rules around liquidity, risk, diversification transparency and leverage which the ETF must comply with. For more information, this article provides a useful summary.
Retail investors will note that when browsing through the list of ETFs available to purchase, many of these investment products will have the word “UCITS” in the product name. This of course means these products comply with the UCITS directive. For example, “Vanguard S&P 500 UCITS ETF VUSD”.
Why invest in Exchange-Traded Products?
There are many advantages to investing through ETPs:
Because the underlying investments are pooled into one fund, investors avoid placing their money into a limited number of shares or individual bonds (all eggs in one basket approach). This helps investors to diversify and spread risk.
ETPs allow investors the opportunity to invest in more exotic stock markets or asset classes that may be difficult to access directly.
The management costs can be lower than other investment products. This is especially the case for passive funds that track an index as opposed to actively managed funds.
Unlike certain funds such as Closed-end Funds, ETPs can be bought and sold on a recognised stock market. That means they can be traded in the same way as shares (when the market is open).
Where to buy Exchange-Traded Products
Several investment institutions and asset managers such as Vanguard and Fidelity offer their own ETPs. Some of these organisations also offer ETPs from other providers on their own platform.
There are also a number of independent share trading platforms that offer ETPs from across the entire market. For example, IG offer over 2000 ISA eligible ETFs and allow investors to search by asset class, region, recent performance history etc.
IG’s platform also has a fact sheet for each ETP and most of these contain performance ratings issued by Morningstar, an independent investment research company. Funds are awarded ratings from one to five stars, with the best performing funds receiving five stars
