This lesson provides an introduction to Exchange Traded Products (ETPs), including different categories and types of ETPs, as well as how they may offer investors certain types of exposure and returns.
ETPs At A Glance
An exchange-traded product (ETP) is a financial instrument traded on a regulated stock exchange. It is designed to replicate the return of an underlying benchmark or asset before fees, with the easy access and tradability of a share.
Exchange-traded products offer investors access to a whole universe of exposures, from traditional asset classes like equities and bonds to alternatives like commodities and currencies, once only accessible for institutional investors.
Unlike traditional index funds, ETPs trade intraday. Therefore, investors can buy and sell at any point during market hours and monitor prices on an exchange. Also, ETPs don’t impose minimum investment capital limits or early redemption charges.
ETPs come in many forms and are typically divided into three categories:
- Exchange-Traded Funds (ETFs),
- Exchange-Traded Commodities (ETCs), and
- Exchange-Traded Notes (ETNs).
Exchange-Traded Funds (ETFs)
ETFs are structured as funds and commonly governed by the UCITS framework in the European Union, which provides a number of important safeguards for investors.
Exchange-Traded Commodities (ETCs)
ETCs are issued as debt securities. Unlike ETFs, they are not restricted by UCITS diversification requirements and can therefore provide exposure to individual commodities and currency pairs, as well as diversified baskets.
Exchange-Traded Notes (ETNs)
ETNs are generally issued by banks and are usually entirely reliant on the creditworthiness of the issuing entity.
Short &Leveraged ETPs (S&L ETPs)
Investors can also gain both short and leveraged exposure to a variety of asset classes through tactical use of short and leveraged ETPs. Unlike other short and leveraged positions, S&L ETPs do not involve borrowing and losses cannot exceed the initial amount invested.
If the FTSE 100 was to increase 3% on a given day, a 2-times (2x) leveraged FTSE 100 ETP would be expected to provide a return of 6%, and a 2x short FTSE 100 ETP would be expected to provide a return of -6%.
Due to the potential for volatility of any exposure, investors should acknowledge that these are short-term instruments and that they should be actively monitored.
Investors can also invest in a single currency ETP or basket of currencies.
Currency ETPs aim to replicate fluctuations in the foreign exchange market.
If an investor believes that the US Dollar was to strengthen in comparison to Pounds Sterling, one could invest in a long USD/short GBP ETP to profit from that fluctuation.
There are also currency hedged ETPs, which not only provide exposure to the underlying asset, but also include a built-in currency hedge to mitigate the impact of currency fluctuations.
Since commodities are priced in US dollars, a UK investor looking to enter the market can utilize a sterling currency hedged commodity ETP.
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Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Academy that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Academy are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
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