An exchange-traded product (ETP) refers to a broad category of financial instruments that are traded on exchanges and offer investors access to various asset classes, including equities, bonds, commodities or indices.
ETPs combine features of traditional mutual funds and individual securities, offering investors a convenient and liquid way to diversify their portfolios. In most cases, the collateral (securities or precious metals) is deposited with a third party. The underlying assets are usually individual commodities, but can also be baskets, indices or other asset classes.
Types of ETPs
- Exchange Traded Funds (ETFs): ETFs are a popular form of ETP that track the performance of a specific index, sector, commodity or asset class. They are traded on exchanges during the trading day, allowing investors to buy and sell shares at market prices.
- Exchange Traded Notes (ETNs): ETNs are debt securities whose value is derived from the performance of an underlying index. In contrast to ETFs, ETNs are unsecured bonds that carry the credit risk of the issuer.
- Exchange Traded Commodities (ETCs): ETCs give investors access to commodities such as gold, silver or oil. They can be structured as ETFs or ETNs and offer a way for investors to participate in commodity price movements without physically owning the commodities.
The advantages of ETPs
ETPs are traded on exchanges and offer intraday liquidity to investors. This feature allows investors to open or close positions at current market prices. Many ETPs publish their holdings daily, increasing transparency for investors. This transparency allows investors to make informed decisions based on the underlying assets in the ETP.
ETPs also allow investors to diversify their portfolios by giving them access to a variety of assets without having to buy each individual security separately. As a result, exchange traded products are often associated with lower costs compared to traditional investment funds, making them a cost-effective investment option for many investors.