What Are Exchange-Traded Products (ETPs)?

ETPs combine characteristics of traditional investment funds and listed securities. They offer transparency, as pricing is visible throughout the trading day, and flexibility, as investors can buy and sell them intraday at market prices. Due to these features, ETPs are widely used by retail investors, professional traders, and institutional participants.

ETPs are often used to gain access to markets or asset classes that may be difficult or costly to access directly, such as commodities, foreign equity indices, or complex strategies.

Types of ETPs

The term ETP covers several product structures, each with different legal and risk characteristics.

Exchange-Traded Funds (ETFs)

ETFs are the most common form of ETPs. They are typically structured as funds that hold a diversified basket of assets, such as equities or bonds, and aim to replicate the performance of a specific index. Most ETFs use physical replication, meaning the fund owns the underlying securities either fully (full replication) or partially (sampling).

ETFs are generally considered transparent and cost-efficient. However, investors are still exposed to market risk, tracking error, and, in some cases, securities lending risks.

Exchange-Traded Commodities (ETCs)

ETCs provide exposure to commodities such as precious metals, energy products, or agricultural goods. They can be physically backed (for example, gold stored in secured vaults) or synthetically replicated using derivative contracts.

Because commodities do not generate income like dividends or interest, ETC returns are driven primarily by price movements and, where applicable, futures roll yields.

Exchange-Traded Notes (ETNs)

ETNs are unsecured debt instruments issued by a financial institution. Rather than holding assets, the issuer commits to paying the return of a referenced index or strategy at maturity.

Unlike ETFs and ETCs, ETNs carry issuer credit risk. If the issuing institution becomes insolvent, investors may not receive the promised return regardless of the index performance.

How ETPs Track Their Underlying

ETPs rely on replication mechanisms to achieve their investment objective.

Physical replication involves directly holding the underlying assets. This approach reduces counterparty risk but may result in tracking differences due to transaction costs, taxes, or index rebalancing.

Synthetic replication uses derivatives, most commonly total return swaps, to mirror the performance of the underlying. Synthetic ETPs may offer more precise tracking and access to hard-to-reach markets, but they introduce counterparty risk and reliance on collateral structures.

Trading, Liquidity, and Pricing

ETPs trade continuously on exchanges during market hours. Their liquidity is supported by market makers and authorised participants who create and redeem shares in large blocks. This mechanism helps align the market price of an ETP with its net asset value (NAV).

Investors should still be aware of bid-ask spreads, market volatility, and underlying asset liquidity, all of which can influence execution quality.

Advantages and Risks of ETPs

Advantages include:

• Intraday tradability and price transparency
• Broad diversification through a single instrument
• Generally lower costs compared to actively managed funds
• Easy access to a wide range of asset classes

Risks include:

• Market risk linked to the underlying asset
• Tracking error and performance deviations
• Counterparty or issuer risk for synthetic products and ETNs
• Currency risk when investing in foreign assets