Exchange-traded products (ETPs) are kind of regularly priced securities that trade during the daytime on a national stock exchange. ETPs track underlying securities, financial instruments or an index. Individual underlying securities, such as stocks and bonds, are not considered ETPs. Since ETPs trade on stock exchanges like other stocks, their prices can fluctuate every day. However, their prices usually depend on the underlying investments that they track.
Since 1993, ETPs products have grown significantly in size and popularity. The low-cost structure of ETPs have mainly contributed to its popularity, which has taken the sheen off higher-cost actively managed funds.
Types of ETPs
There are mainly two types of ETPs- Exchange Traded Funds (ETFs) and Exchange Trade Notes (ETNs). ETFs consist of several investments, such as stocks and bonds. An ETF usually tracks an underlying index such as the S&P 500 but can follow an industry, sector, commodity, or even currency.
On the other hand, ETNs also track an underlying index of securities and trade on major exchanges. However, ETNs happen to be bundles of unsecured debt securities. ETNs pay the investors the return they receive from the index they track at the maturity date.
Advantages and disadvantages of ETPs
ETPs open up securities and indices for investors. ETPs are more affordable than mutual funds or actively managed funds. ETPs like ETFs are finding high acceptance among the investors, providing additional liquidity.
ETPs have the risk of market losses since their prices fluctuate. ETPs often behave like debt instruments such as ETNs. ETPs have inconsistent trading volumes, that can affect liquidity.
ETPs require a brokerage account to trade. Hence, buying and selling of ETP shares could result in a brokerage commission. However, some very liquid ETPs can be sold without a commission charge. Differences in the buy and sell price could add to the cost of trading ETPs. Moreover, unlike mutual funds, ETPs qualify for advanced types of orders such as limit orders and stop orders.
Overall, ETPs have mostly gained in popularity since its inception. Investors are also seen to be interested in trading with ETPs.
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