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Exchange Traded Perceptions

ETPs, ETFs, ETCs and ETNs – Sandeep Rao, Researcher at Leverage Shares explains why it’s important to distinguish between the ‘Es’.

Over time, the term “Exchange-Traded Fund” (ETF) has become a blanket term used in place of “Exchange-Traded Products” (ETP). While all of the former are the latter, it’s not always the case the other way around.

All ETPs are financially engineered products benchmarked to myriad asset classes: stocks, bonds, commodities, real estate, etc.  The most plain vanilla type is designed around a large “basket” of stocks, bonds or specific commodities, and they are considered ETFs. When the basket becomes smaller or adds special features such as leverage or short exposure, then they’re considered ETPs. Notably, practitioners often use the two terms interchangeably, which can lead to investor confusion.

An example of this terminology tightrope is illustrated below. As of October this year, it was reported that roughly $112 billion  is held in leveraged ETFs/ETPs.

Around the same time, Statista reported that over $6.3 trillion in AUM was held in ETPs worldwide by the end of 2019.

This estimate may or may not have taken leveraged ETP AUM into consideration: ETF providers distribute their data far and wide, as they are frequently included within retirement funds and pension plans, while take up of ETPs varies widely by region and can depend on their underlying composition.

Time and Attention

ETPs are also more commonly used for short-term exposure to a market, asset class or stock, and appeal to both retail and institutional investors.  However, retail investors do also invest in unleveraged broad-based ETFs. These tend to be held in their “core portfolio”, providing them steady access to market-, sector-, or theme-oriented returns. Supervision of the basket of assets falls to the ETF provider in these instances, which means they require minimal daily management.

Conversely, leveraged ETPs, derivatives and individual stocks would be much more likely to sit within their satellite portfolio to gain access to short-term trends in a limited-risk fashion but requiring much more active supervision. Depending on jurisdiction, both ETPs and ETFs qualify for the same advantageous tax treatment.

All ETPs (be they ETFs or otherwise) are continuously priced and made available by designated market makers who provide bid/ask spreads throughout the day and are responsible for facilitating buy and sell transactions.

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