Exchange Traded Products – ETP

Exchange-traded products (ETP) are a type of security that is derivatively priced and trades intra-day on a national securities exchange. ETPs are priced so the value is derived from other investment instruments, such as a commodity, a currency, a share price or an interest rate. Generally, ETPs are benchmarked to stocks, commodities or indices. They can also be actively managed funds. ETPs include exchange-traded funds (ETFs), exchange-traded vehicles (ETVs), exchange-traded notes (ETNs) and certificates.

The ETP that is the most popular is the ETF. ETFs are securities that track an index, commodity or basket of assets. ETNs, on the other hand, are a type of unsecured, unsubordinated debt security. The value of an ETN can be affected by the credit rating of the issuer and not just changes in the underlying index.

ETPs have experienced huge growth since they were introduced. Different tax treatment applies to the various types of ETPs.

ETPs such as the ETF were developed out of the desire to create a fund that had more flexibility than the mutual fund. Mutual funds are typically priced just once at the end of the trading day, but ETFs trade like stocks and can be bought and sold throughout the day. ETPs often carry slightly lower expense ratios than their mutual fund counterparts. The largest ETF in the marketplace is the SPDR S&P 500 ETF, with assets of more than $254 billion as of May 2018.

ETPs also require a brokerage account to trade, so buying and selling ETP shares is likely to result in brokerage commission costs. Additionally, differences in the bid price and ask price of a security could add to the cost of trading in ETPs. Many no-load mutual funds, on the other hand, can be bought and sold without any trading commission, and they do not require a brokerage account.

Since the debut of the first ETF in 1993, these funds and other ETPs have grown significantly in size and popularity. In 2017, ETFs claimed roughly $4.8 trillion in total assets under management (AUM), according to ICI.org.

The low-cost structure of ETPs has contributed to their popularity. Many ETPs are lower-cost index funds, which continue to attract assets away from potentially higher-cost actively managed funds. However, the amount of money being pulled out of actively managed funds dwindled in 2017 after several years of more substantial outflows. Passively managed funds gained around $464 billion in net asset inflows in 2017, while actively managed funds saw net outflows of $7 billion during the same period, according to Morningstar. In recent years, actively managed funds had seen outflows in the hundreds of billions.