This lesson highlights some of the opportunities and risks presented by ETPs.
Benefits & Risks of ETPs
Before deciding if exchange-traded products (ETPs) are the right type of investment for your portfolio, you should explore the facts.
Some of the benefits of using ETPs include:
ETPs are flexible. They can provide access to an entire index, or alternative asset classes, with a single trade.
ETPs are accessible and can be bought and sold whenever the stock exchange is open.
The relatively low costs associated with managing ETPs, compared to other investments, make them a cost-effective way for investors to gain access to a wide range of asset classes.
ETPs are transparent. ETP constituents are published on a daily basis, making it easier for investors to see exactly what they own.
ETPs are simple. They are listed on an exchange and traded in a similar way as shares.
But as with all investments, there are risks. It is important to distinguish what risks an ETP is subject to before making an investment.
The objective of ETPs is to replicate the performance of an underlying benchmark minus fees. They are therefore exposed to market risks driven by price movements in the underlying.
All ETPs incur costs, whether ongoing charges – a measure of recurring costs in an ETP, which represent the cost of managing a product, also referred to as the Total Expense Ratio.
Portfolio transaction costs, which include variable fees associated with the buying and selling of securities in an ETP by the ETP issuer. And trading and post-trading costs incurred by the end investor when trading an ETP.
- Tracking Difference
The structure and cost of an ETP means it may not track its underlying exactly. This is referred to as tracking difference.
- Tax Considerations
And as with all investments, ETPs will usually incur some form of taxation. Investors should therefore consider obtaining independent tax advice before investing in ETPs.
- FX Risk
Plus, any investment based in a non-local currency will be affected by exchange rate fluctuations. Currency hedged ETPs can mitigate this risk, providing exposure to the underlying without an additional currency risk.
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Disclosure: Wisdom Tree
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Disclosure: Interactive Brokers
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This material is from Wisdom Tree and is being posted with permission from Wisdom Tree. The views expressed in this material are solely those of the author and/or Wisdom Tree and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.
Disclosure: Leverage ETFs
Complex or Leveraged Exchange-Traded Products are complicated instruments that should only be used by sophisticated investors who fully understand the terms, investment strategy, and risks associated with the products. Learn more about the risks here: https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?formdb=4155