Duration: 3:32
Level: Beginner

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.

Contributed By: WisdomTree Europe

Study Notes:

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.

For example:

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.

Currency ETPs

Investors can also invest in a single currency ETP or basket of currencies.

Currency ETPs aim to replicate fluctuations in the foreign exchange market.

For example:

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.

For example:

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: WisdomTree Europe

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

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Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus 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 WisdomTree Europe and is being posted with its permission. The views expressed in this material are solely those of the author and/or WisdomTree Europe and Interactive Brokers 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 buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. 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.

Disclosure: Forex

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: Complex or Leveraged Exchange-Traded Products

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