Key Points
- Financial products, indexes, or underlying securities are tracked by exchange-traded products (ETPs).
- ETPs are traded on exchanges like equities.
- ETP prices are subject to intraday and daily fluctuations.
- The underlying investments that ETPs track determine their share price.
CryptoCaster Quick Check:
Instruments that track underlying securities, an index, or other financial products are known as exchange-traded products, or ETPs. Like stocks, ETPs are traded on exchanges where shares can be bought and sold, and their prices can change during a trading day. The underlying investments that ETPs track determine the share prices.
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Exchange-Traded Products (ETP)
Exchange-traded products can be compared to a wide range of financial instruments, such as stocks, bonds, currencies, and commodities. A few or hundreds of underlying investments can be found in an ETP. These are the different kinds of ETPs that are traded.
Exchange-Traded Funds (ETFs)
An exchange-traded fund, like a mutual fund, is composed of a variety of investments, such as bonds and stocks. An exchange-traded fund (ETF) typically follows an underlying index, such as the S&P 500, but it can also track a sector, industry, currency, or commodity. The price of an exchange-traded fund can fluctuate, much like the price of other investments. In contrast, these products trade all day, unlike mutual funds, which are only available for trading after hours.
Since many ETFs are passively managed, their low fees are the main factor contributing to their popularity. One of the most well-liked large-cap stock indexes, the S&P 500 index, might be tracked by a passively managed exchange-traded fund (ETF). All of the stocks listed on the index are typically held by an ETF that tracks the S&P 500; however, some funds hold more or less than the index lists. State Street’s SPDR S&P 500 ETF Trust, for instance, held 509 on January 12, 2024, while the S&P 500 listed 503.
A fund manager in an actively managed fund (which an ETF can be) is in charge of keeping the fund performing by switching out underperformers with better performers. This can result in higher fees because the managers must be compensated for their time and may have to pass on trading fees. A mix of both passive and active characteristics can be found in certain ETFs.
Exchange-Traded Notes (ETNs)
Similar to exchange-traded funds (ETFs), exchange-traded notes (ETNs) track unsecured debt securities and are issued as bonds, but they also trade on major exchanges and typically track an underlying index. ETNs are issued in the form of bonds, which at maturity pay back the principal amount invested plus any additional gains. Periodic interest payments, also known as coupon payments, are not made by ETNs. Because of this, the issuer’s creditworthiness determines the possibility that investors will receive their money back in addition to the returns from the underlying index.
The different kinds of ETPs are subject to different tax treatment. If there are any possible tax repercussions from investing in ETPs, investors should consult a tax expert.
Exchange-Traded Commodities (ETCs)
Commodity prices can be exposed to by investors through financial instruments called exchange-traded commodities (ETCs). These instruments can have an ETN or ETF structure. ETCs are easily accessible and tradeable by investors on stock exchanges, just like individual stocks.
Typically, a variety of commodities, such as energy resources, agricultural products, precious metals, or a combination of these, make up the underlying assets of exchange-traded contracts (ETCs). With ETCs, investors can purchase and sell commodities without having to hold or possess any of the underlying goods. This implies that without ever having to store or hold a physical commodity, investors can profit from commodity indices, commodity futures contracts, or specific commodities.
Actual Exchange-Traded Product Examples
With more than $480 billion in assets as of January 2024, the SPDR S&P 500 ETF (SPY) is the largest ETF available. All 500+ stocks that are listed on the S&P are owned by the ETF. Here are a handful of the leading businesses that SPY owns:
- Apple Inc.
- Microsoft Corp.
- Amazon.com Inc.
- NVIDIA Corp.
- Alphabet Inc.
- Meta Platforms Inc. (formerly Facebook)
In Summary
Financial instruments known as exchange-traded products, which are traded on stock exchanges, give investors exposure to a variety of asset classes, including stocks, bonds, currencies, and commodities. ETPs can be structured investment products (SIPs) represented by ETFs, ETNs, ETCs, or other vehicles.
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