- Exchange-traded products (ETPs)—including exchange-traded funds (ETFs), exchange-traded notes (ETNs) and some other similar product types—are investment vehicles that are listed on an exchange and can be bought and sold throughout the trading day like a stock.
- ETPs track the performance of underlying assets or benchmarks. While some ETPs can provide cost-effective diversification, others don’t.
- ETFs, the most common type of ETP, are pooled investment opportunities that typically include baskets of stocks, bonds and other assets grouped based on specified fund objectives.
- Unlike ETFs, ETNs don’t hold assets—they're debt securities issued by a bank or other financial institution, similar to corporate bonds.
- All ETPs are regulated under the Securities Act of 1933 and Securities Exchange Act of 1934, but different ETPs may offer different levels of investor protection and be subject to different regulatory requirements and oversight.
- An ETP’s prospectus and related documents, such as a pricing supplement, will include its investment objectives, investments, risks, fees and expenses and other important information.
- All ETPs have fees and expenses. Use FINRA’s Fund Analyzer to analyze and compare the costs of owning specific funds.
There's no single definition of an exchange-traded product (ETP). In general, though, an ETP is a security that’s listed on a U.S. exchange and seeks to provide exposure to the performance of a benchmark (such as the price of gold), an index (such as the S&P 500) or an actively managed strategy. Exchange-traded funds (ETFs) are the most common and most well-known type of ETP, but ETPs also include exchange-traded notes (ETNs), commodity pools and other product types.
ETFs and other ETPs generally combine aspects of mutual funds and conventional stocks. Like stocks, ETPs are listed on a securities exchange, are publicly traded throughout the day and have prices that can fluctuate based on market forces. ETPs can also be sold short, purchased on margin or have options contracts written on them. And, like mutual funds, they track an underlying index or asset or might reflect an actively managed strategy.
Some ETPs can offer a convenient and cost-effective way for investors to diversify their portfolio. Others, however, do not—such as single stock ETFs or ETNs that are tied to a narrow index or esoteric benchmark. As with any investment, ETPs can expose you to a range of risks, so understanding the products and how they work is important.
A significant feature of ETPs is that they offer two layers of liquidity. Transactions in ETPs can occur:
- directly with issuers in the primary market—where newly issued securities are sold to investors—through a specific, unique creation (issuance) and redemption mechanism typically involving broker-dealers and large transactions worth millions of dollars; or
- more commonly, through transactions that occur in the secondary market— where existing securities are bought and sold—through transactions on an exchange or other venues (such as alternative trading systems or over-the-counter) just like stocks.
Historically, the vast majority of ETP activity has occurred in the secondary market, which is where most retail investor trades occur.
Some ETPs are more similar to mutual funds than others. ETFs, like mutual funds, are pooled investment funds that offer investors an interest in a professionally managed, diversified portfolio of investments. But unlike mutual funds, ETF shares trade like stocks and can be bought or sold throughout the trading day at fluctuating prices. They're also subject to bid-ask spreads, which represent the difference between the highest price a buyer will pay and the lowest price at which a seller will sell shares of a stock at any given time.
On the other hand, while ETNs also trade like stocks, they're more similar to corporate bonds in that they're debt issued by a financial institution and subject to the credit risk of that issuer. Unlike a mutual fund or ETF, an ETN has no underlying portfolio of assets. Unlike a corporate bond (but similar to a structured note), an ETN represents a promise to pay a return at maturity reflecting the performance of some benchmark or index, so repayment at maturity may be greater than or less than par value, or face value. Some ETNs might make periodic distributions, but others don't.
All ETP trading is regulated under the Securities Act of 1933 and Securities Exchange Act of 1934. Depending on their particular structures (such as ETF or commodity pool), ETPs may also be subject to regulatory requirements and oversight by different Securities and Exchange Commission (SEC) divisions or the Commodity Futures Trading Commission and may offer different levels of investor protection.
Most ETPs are structured as ETFs, which are registered with and regulated by the SEC as investment companies under the Investment Company Act of 1940. ETFs generally focus their investments in stocks or bonds and have diversification requirements. Alternatively, some ETPs investing in commodities, currencies or commodity- or currency-based instruments such as futures aren’t registered under this act, which can subject investors to differing degrees of regulatory protection. ETNs, on the other hand, aren’t registered as investment companies because they're corporate debt and don’t hold an underlying portfolio of assets.
Investment objectives and strategies, which are detailed in prospectuses and related documents, can vary from one ETP to another. The vast majority of ETPs are designed to track the performance of a particular market index or benchmark and are similar to index mutual funds. Importantly, ETPs tracking the same index may do so in different ways, so be sure to compare.
Some ETPs are designed to provide returns that are leveraged (such as two- or three-times) or inverse (such as the opposite or twice the opposite) of the return of the index or benchmark they track. These are typically referred to as leveraged or inverse (collectively, “geared”) ETPs. This geared exposure is usually for a specific period, like one day or one month, and such products are generally not designed to be held for periods that deviate from that.
ETPs can track a wide variety of indexes across many asset classes, as well as different investment or trading strategies. Some are very well-known or broad market benchmarks or indexes, such as total stock or bond market indexes. Other ETPs track indexes that are more narrowly focused, such as those made up of companies in a specific industry sector or country, corporate bonds with particular credit ratings, or individual commodities or currencies. Some of the indexes and investment strategies used by ETPs can be quite sophisticated and might not have much performance history or, in some cases, easily accessible information.
Before making any investment, know your financial objectives and understand the risks of the exact type of product you’re considering.