What is an ETP and how can you trade or invest?

What is an ETP?

An ETP (or exchange-traded product) is a tradeable financial instrument that closely tracks an underlying market, such as indices, currencies and shares. They’re derivative securities that work by repackaging the value of an underlying asset and listing it on an exchange to be traded publicly.

As with other derivative instruments, the price of an ETP will change based on fluctuations in the asset it tracks. This means you could potentially profit from a market, whether it’s rising or falling in value.

Like shares, ETPs are traded on an exchange – such as the Australian Securities Exchange (ASX) – which usually means they’re only accessible during normal market hours. However, some issuers are beginning to offer round-the-clock trading on a few of these instruments.

Types of exchange-traded products

There are many types of exchange-traded products that traders and investors can access. Here are a few popular ETPs along with a basic definition:

• Exchange-traded funds (ETFs): a form of investment fund that’s bought and sold on stock exchanges. ETFs usually track the performance of a benchmark index and hold assets that help them to do just that
• Exchange-traded notes (ETNs): a type of exchange-traded product that enables you to trade the performance of an index or asset in the form of unsecured debt. This means that the issuer (usually a bank) prices the security based the underlying market it tracks but doesn’t physically own it. Because ETNs are not backed by any collateral, you could lose some or all of your capital should the issuer become unable to honour their debt to you
• Exchange-traded commodities (ETCs): tradeable financial derivatives that track the performance of a commodity, a group of commodities, or a basket of goods through an index. Some ETCs may consist of a swap agreement, which may or may not be secured by collateral. For this reason, some ETCs can be seen as a type of ETN
• Exchange-traded instruments (ETIs): financial securities that normally track an index but can also reflect the value of an actively managed investment portfolio. Note, however, that ‘ETI’ is sometimes used interchangeably with ‘ETP’ to refer to the overall category
• Exchange-traded derivative contracts: financial derivatives that are traded on exchange rather than over the counter (OTC) – such as stock options and currency futures
• Closed-end funds (CEFs): mutual funds that raise capital by issuing a fixed number of shares to be bought and sold on an exchange, but not redeemed.
  
  This means you won’t own shares in the fund but rather you’re trading on the fund’s value with other market participants on an exchange

What are examples of exchange-traded products?

ETFs vs ETNs vs ETCs

ETFs, ETNs and ETCs are some of the more popular types of exchange-traded products available on the market. While they may have similarities, there are a few differences to take note of. Below is a basic comparison of the products’ key features.

Share trading

With our share trading account, you can buy and sell local and international stocks as well as exchange-traded products like mutual funds, trusts, exchange-traded funds and ETCs.

When you use this method to access the markets, you’re essentially buying shares in the asset to own in the hope that they rise in value over time so that you can sell them for a profit. For this reason, you can only take a long position in your share trading account.

CFD trading

In addition to building a diversified investment portfolio with ETPs, you can also trade on them using over-the-counter derivatives like like CFDs (contracts for difference). They enable traders to take a position on the price direction of a market – whether it’ll increase or decrease.

CFDs are leveraged, which means you’ll gain full exposure to the underlying market for a percentage of the cost, known as the margin. While this means any profits made can be amplified, so too will any losses you incur.

Our CFD account gives you access to thousands of financial markets, including ETFs, ETNs, ETCs and other exchange-traded products. There are different ways to trade CFDs – via spot markets, futures or options.

Options

Options are a type of tradeable derivative contract that give the holder the right, but not the obligation, to buy or sell an underlying asset at a fixed price – provided it moves beyond that price within a set timeframe.

You can trade ETP options using CFDs, which means you can trade the markets by going long (known as buying a call option) or short (buying a put option).

Futures

Futures are financial contracts in which two parties – a buyer and a seller – agree to exchange an underlying market for a set price at a future date.

These instruments give the buyer the obligation to buy the asset, and the seller the to sell it, on or before the contract expires. As with options, you can trade futures using a CFD trading account from us.

How to trade and invest in ETPs summed up

• Exchange-traded products or ETPs are securities that are listed on an exchange and can be traded using our CFD trading account, or invested in through our share trading account
• Some of the more popular kinds of ETPs are exchange-traded funds (ETFs), exchange-traded notes (ETNs) and exchange-traded commodities (ETCs)
• ETFs are a type of investment fund that seek to track the performance of a benchmark index
• ETNs enable you to take a position on the value of an index or asset in the form of unsecured debt
• ETCs closely track a commodity, group of commodities or a basket of goods through an index