Exchange-traded product

An exchange-traded product is a regularly priced security which trades during the day on a national stock exchange. ETPs may embed derivatives but it is not a requirement that they do so – and the investment memorandum should be read with care to ensure that the pricing methodology and use of derivatives is explicitly stated. Typically, individual underlying securities, such as stocks and bonds, are not considered ETPs.

Overview

ETPs are often benchmarked to indices, stocks, commodities, or may be actively managed. There are several types of ETPs, including:

Closed-end funds are collective investment vehicles which restrict the investors right to redeem their units at net asset value
Exchange-traded derivative contracts
Exchange-traded funds are mutual funds trading at a stock exchange having agreements in place to ensure that the stock exchange price always is close to the NAV
Exchange-traded notes are unsecured derivative debt obligations issued by banks or investment firms with a repayment value linked to an index or basket of assets
Exchange-traded commodities are asset-backed securities repackaging the value of commodities or currencies and listed at a stock exchange. ETCs allow people to invest in markets often difficult to access like commodities such as metals, livestock, and energies. ETCs are known in the European market where mutual funds cannot invest in single commodities or undiversified baskets of commodities. The distribution and marketing of ETCs thus is not regulated by mutual fund laws but by the Prospectus Directive. ETCs come in two forms:
Exchange-traded instruments are structured financial securities that allow investors to access specific investment strategies through instruments listed on regulated markets. ETIs can track a wide variety of securities, including equities, indices, commodities, cryptocurrencies, investment funds, quantitative strategies, and structured products. Unlike traditional investment funds, ETIs offer greater operational flexibility and liquidity, as they can be bought and sold throughout the trading day. They are subject to the Prospectus Regulation and other financial market regulations, ensuring transparency and proper risk disclosure. ETIs are also recognised under MiFID II and may be UCITS-eligible, depending on their structure and underlying exposure. ETIs are particularly popular in Europe due to their ability to package complex or thematic strategies into a liquid and exchange-tradable format.

ETPs also qualify for advanced types of orders such as limit orders and stop orders. This is in contrast to traditional mutual funds which are only available for buying and selling at certain points in the day.

Regulation

On October 6 of 2021, SEC Chair Gary Gensler warned that leveraged exchange traded products present a risk to the "stability of financial markets" and called for tighter regulations on the "complex" products. He said " can pose risks even to sophisticated investors and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions". Leveraged ETFs have been found to exaggerate intraday momentum. However, this momentum is often rebalanced at next trading day's opening as the momentum is not due to any new information. This means that the momentum is due to automatic actions from the ETFs when responding to temporary price pressures.