An exchange-traded product (ETP) is a regularly priced

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which trades during the day on a national

stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for th ...

. ETPs may embed derivatives but it is not a requirement that they do so - and the investment memorandum (or offering documents) should be read with care to ensure that the pricing methodology and use (or not) of derivatives is explicitly stated. Typically, individual underlying securities, such as

stocks Stocks are feet restraining devices that were used as a form of corporal punishment and public humiliation. The use of stocks is seen as early as Ancient Greece, where they are described as being in use in Solon's law code. The law describing ...

and bonds, are not considered ETPs. ETPs are often benchmarked to indices,

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...

, or may be actively managed. There are several types of ETPs, including: *

Closed-end fund A closed-end fund (CEF) is a fund that raises capital by issuing a fixed number of shares which are not redeemable, and then invest that capital in financial assets such as stocks and bonds. Unlike open-end funds, new shares in a closed-end fund ...

s (CEFs) are collective investment vehicles which restrict the investors right to redeem their units at net asset value (NAV) * Exchange-traded derivative contracts * Exchange-traded funds (ETFs) 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 (ETNs) 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 (ETCs) are asset-backed securities repackaging the value of commodities or currencies and listed at a stock exchange. ETCs are known in the European market where - other than in the USA - 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. *Exchange-traded instruments (ETIs) are derivative securities repackaging the value of an index or even actively managed portfolio issued by financial institutions and listed at a stock exchange. ETIs are known in the European market where several investment strategies cannot be replicated within a mutual fund and ETIs are set up as an alternative investment vehicle to overcome these restrictions. The distribution and marketing of ETCs thus is not regulated by mutual fund laws but by the Prospectus Directive. These investment vehicles are sometimes also marketed as Exchange-traded certificates or (if unlisted) actively managed certificates (AMC) ETPs also qualify for advanced types of orders such as limit orders and

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. This is in contrast to traditional

mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...

s which are only available for buying and selling at certain points in the day.

Regulation

On October 6 of 2021, SEC Chair

Gary Gensler Gary Gensler (born October 18, 1957) is an American government official and former investment banker serving as the chair of the U.S. Securities and Exchange Commission. Gensler previously led the Biden–Harris transition's Federal Reserve, B ...

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 "

leveraged In finance, leverage (or gearing in the United Kingdom and Australia) is any technique involving borrowing funds to buy things, hoping that future profits will be many times more than the cost of borrowing. This technique is named after a lever i ...

ETPs] 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.

References

Exchange-traded products {{econ-stub

Regulation

See also

References