What are exchange-traded products (ETPs)?

Have you heard of the SPDR S&P 500 ETF Trust (SPY)? Launched on 22 January 1993, it was the first exchange-traded fund listed in the US. Today, it’s a widely used way for traders to gain exposure to some of the largest blue-chip stocks on the S&P 500, including Apple, Nvidia, Microsoft, Amazon, and Meta Platforms.

By holding SPY units, investors gain exposure to Berkshire Hathaway’s Class B shares, which offer access to Warren Buffett’s conglomerate at a lower price point than the Class A shares, which trade for over $600,000 per share.

Understanding exchange-traded products (ETPs)

Exchange-traded products (ETPs) are securities that trade on public stock exchanges in the same way as ordinary shares. They track an underlying asset or index – such as equities, commodities, currencies or bonds – and derive their price from the value of that underlying. ETPs encompass a broad range of instruments, including exchange-traded funds (ETFs), exchange-traded notes (ETNs), and exchange-traded commodities (ETCs).

ETPs have grown in popularity for several key reasons. They offer cost-efficient market exposure compared with many actively managed funds, owing to their typically lower expense ratios and tax-efficient structures, with no stamp duty on UK listings. Their high liquidity and narrow bid–ask spreads make them easy to trade throughout the day. Investors benefit from transparent holdings, visible in real time, and from portfolio diversification via a single trade that can span multiple sectors or regions. Finally, ETPs provide flexible access to specialised or leveraged strategies, as well as thematic exposures such as ESG or digital assets, without the need to manage the underlying assets directly.

By lowering barriers to entry and offering diverse, low-cost access to global markets, ETPs have become a widely used tool for both institutional and retail investors seeking efficient portfolio construction and enhanced risk management.

Examples of exchange-traded products

The term ‘exchange-traded products’ is a broad category encompassing several distinct types of instruments. The most common are exchange-traded funds (ETFs), exchange-traded notes (ETNs), and exchange-traded commodities (ETCs).

Exchange-traded funds (ETFs)

These are the most common types of ETP. An ETF is a fund that holds a diversified portfolio of securities such as shares, bonds, or commodities. The SPDR S&P 500 ETF Trust (SPY), launched by State Street Global Advisors, tracks the S&P 500 index. When you buy a share of this ETF, you own a small part of every constituent in the index. ETFs are widely used because they offer full transparency, high liquidity throughout the trading day, and typically lower expense ratios than comparable actively managed funds.

Exchange-traded notes (ETNs)

ETNs are unsecured senior debt securities issued by a financial institution. They promise to pay a return linked to an underlying index or asset, such as a commodity index. When you buy an ETN, you are not acquiring the underlying assets but entering into a debt obligation with the issuer. Consequently, ETNs carry issuer credit risk – if the bank defaults, investors may lose some or all of their capital.

Exchange-traded commodities (ETCs)

ETCs track one or more commodities and are structured either as physically backed certificates or synthetic instruments. For example, an ETC may follow the price of gold, oil, or a basket of agricultural products. ETCs are similar in structure to ETFs but focus exclusively on commodity exposure, often incorporating features such as roll yield management for futures-based series.

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Characteristics of exchange-traded products

ETPs have specific characteristics that define their structure and performance. These features contribute to their broad use among market participants.

Liquidity and market accessibility

ETPs are typically highly liquid, trading continuously on an exchange to allow intraday access and real-time pricing. This contrasts with mutual funds, which are priced only once at the end of each trading day. High trading volumes in ETPs generally result in narrow bid–ask spreads, facilitating efficient entry and exit.

Cost structure and expense ratios

ETPs generally offer cost efficiency through low expense ratios, which cover operating expenses and are often lower than those of actively managed mutual funds. Although bid–ask spreads and transaction fees apply, total expense ratios remain an important factor for cost-conscious investors.

Trading flexibility and transparency

ETPs provide versatile trading options: market, limit, and stop-loss orders can be used, and short selling or margin trading may be available where permitted. Intraday indicative net asset values (NAVs) and daily disclosure of underlying holdings ensure transparency, allowing investors to see which assets the product tracks and at what value.

Additional considerations

While ETPs offer liquidity and transparency, investors should be aware of tracking error relative to the underlying index, possible market impact in less liquid products, and – depending on the structure – counterparty or roll yield risk in synthetic and futures-based ETPs.

Risks associated with exchange-traded products

Like all financial instruments, exchange-traded products (ETPs) carry risks that investors should understand before committing capital.

Market risks and volatility: the value of an ETP can decline if its underlying asset or index falls. This exposure to market movements is a core risk inherent to all exchange-traded products.
Complexity of leveraged ETPs: some ETPs use derivatives or debt to deliver a multiple of the underlying index’s daily performance. For example, a 2× leveraged ETF seeks twice the index’s daily gain or loss. However, daily rebalancing and the effects of compounding mean that longer-term returns may diverge from the index’s overall movement. Margin trading can further magnify potential losses, making leveraged ETPs more appropriate for short-term trading strategies rather than long-term holding.
Liquidity and structural risks: while many ETPs are highly liquid, those tracking less liquid or specialised markets may show wider bid–ask spreads and lower trading volumes, reducing trading efficiency. Investors should also consider tracking error, counterparty exposure in synthetic ETPs, and issuer credit risk in ETNs. Applying sound risk management practices is important when trading any ETP.

Exchange-traded products (ETPs) vs. exchange-traded funds (ETFs)

Some traders may find it difficult to distinguish between ETPs and ETFs. The difference is straightforward: an ETF is a subset of ETPs. The term ‘exchange-traded product’ refers to a broader category that includes ETFs, ETNs, and ETCs. In other words, all ETFs are ETPs, but not all ETPs are ETFs.

The main distinction lies in their structure. An ETF holds the underlying assets, whereas an ETN is a credit-linked debt instrument that does not. This means ETN holders are exposed to issuer credit risk, which ETFs generally avoid.

When to use ETPs vs ETFs

ETFs are typically suited to a wide range of trading strategies, offering transparency and generally lower structural risk. They can be useful for longer-term diversification or strategic allocation. An ETN may be relevant when seeking exposure to markets or strategies not available through physical funds – for example, certain commodity or volatility indices – but it comes with issuer credit risk. Leveraged and inverse ETPs are intended for short-term tactical trading rather than long-term positions.

Past performance is not a reliable indicator of future results.

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FAQs

What are exchange-traded products (ETPs)?

ETPs are financial instruments traded on an exchange in a similar way to shares. They provide cost-efficient and transparent exposure to an underlying asset, such as an index, commodity, or currency. The most common type of ETP is the exchange-traded fund (ETF).

What are the risks associated with exchange-traded products?

Key risks include market volatility, as ETP prices reflect their underlying assets and can fall in line with broader market movements. Tracking errors may cause returns to deviate from the benchmark. Leveraged ETPs use derivatives or debt to amplify gains or losses and are typically intended for short-term trading strategies. ETNs carry issuer credit risk, as they are unsecured debt obligations.

What are the differences between ETPs and ETFs?

An ETF is a subset of ETPs. The term ‘exchange-traded product’ covers ETFs, ETNs, and ETCs. While ETFs hold the underlying assets, ETNs are debt instruments linked to an issuer’s credit, and ETCs provide exposure to commodities through physical holdings or synthetic replication.

Where and how to trade exchange-traded products?

ETPs are traded on major stock exchanges through authorised brokers or trading platforms. Orders can include market, limit, or stop-loss types, and – where permitted – margin or short selling. Real-time pricing and typically high liquidity allow trading throughout the day with efficient execution.