What does ETP mean?
How do ETFs work?
What are the essential elements you should know!
In this article, we will break down the financial definition of ETP so you know all there is to know about it!
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ETP is the acronym that stands for “Exchange Traded Products”.
ETP is a type of investment product that follows or tracks an underlying security like an index.
Just like stocks, exchange traded products are traded on an exchange, are bought and sold by investors on a daily basis.
The market value of an ETP is closely linked to the security or index it is tracking the same way that the value of options are linked to the underlying security.
If the underlying securities perform well and increase in value, the ETP will increase in value.
Conversely, if the underlying securities do not do well and lose value, the ETP associated with it will also lose value.
There are different types of ETP products that can be traded on the market.
You can have many exchange traded products designed to track other securities, such as:
- Any other financial instrument
An ETP product can be designed in many ways.
For example, an ETP can be designed to hold a basket of securities in the banking sector.
Another ETP product can be designed to be benchmarked against an index like the S&P 500.
According to Investopedia, an ETP is defined as follows:
Exchange traded products (ETPs) are types of securities that track underlying securities, an index, or other financial instruments.
In other words, with this definition we can conclude that ETFs are:
- Traded on an stock exchange
- They are an investment product or type of security
- They track other securities or indices
ETPs, just like stocks or bonds, are traded throughout the day on national exchanges and can be readily bought and sold.
Type of ETP Products
ETP products are investment products that are benchmarked against another investment product or security.
For instance, you can have ETPs tracking indices, stocks, commodities.
There are different types of ETP products, such as:
- Closed-end funds (CEF)
- Exchange-traded derivative contracts
- Exchange-traded funds (ETF)
- Exchange-traded notes (ETN)
- Exchange-traded commodities (ETC)
- Exchange-traded instruments (ETI)
An ETP product can be designed in many ways and cater to the risk tolerance of all types of traders and investors.
How They Work
ETP is a financial instrument that is quite popular.
They were developed to provide investors with additional investment options and flexibility.
What’s interesting about ETPs is that they are traded on an exchange just like stocks where they have a price associated with it and investors can track the price fluctuations during the day.
Just like with any other stock investment, a trader or investor will need a brokerage account and will be able to place buy or sell orders to purchase ETP securities.
The ETP price is directly linked to the underlying securities it is tracking.
For example, if an ETP tracks the S&P 500, then if the basket of stocks in the S&P 500 do well, the ETP share price will also do well.
ETPs can be actively or passively managed by a portfolio manager or investment manager depending on the nature of the ETP.
An actively managed ETP may have higher fees associated with the investment whereas a passively managed ETP may have lower fees.
ETP stocks are exchange traded products that are benchmarked against stocks in the stock market.
When we say “stocks”, we are making a general statement about publicly traded stocks in the stock market but not about the specific nature of the ETP.
Within the “stock” category, an ETP can be benchmarked against an industry or a sector.
For example, ETPs can be set up to track the insurance sector, manufacturing sector, or energy.
Generally, when we are dealing with one underlying security such as a stock or a bond, that financial product will not be considered an ETP.
ETP vs ETF
An exchange-traded product (ETP) is a financial product that is regularly priced and that trades on a national stock exchange.
Exchange-traded products can be benchmarked against any underlying security.
A trader or investor can look at the ETP investment memorandum to better understand the product being purchased.
As the name suggests, an exchange-traded “product” is generally referring to a financial instrument that is benchmarked against an underlying security.
On the other hand, an ETF stands for “Exchange Traded Funds”.
In essence, an exchange-traded fund is a specific type of exchange-traded product.
ETFs are similar to mutual funds where they contain a basket of securities tracking an industry, index, sector, or other.
What’s interesting with ETFs is that they are regularly priced during the day and can be bought and sold just like stocks or bonds.
On the other hand, mutual funds are priced at the end of the day and not regularly during the day.
Traders and investors can find benefits in dealing with ETP investment products.
From a trader’s point of view, they are sophisticated investors looking for opportunities to buy or sell securities for a profit.
Just like stocks, bonds, currencies, or commodities, ETP stocks, ETP bonds, ETP currencies, or any other ETP product like ETF (exchange-traded funds) or ETC (exchange-traded commodities) are priced regularly during the day and traders have the ability to immediately transact on them.
From a regular investor’s point of view, ETP is an asset-class of investment that presents various benefits.
A small investor looking to spread risk will either need to buy many individual shares or bonds in the stock market to create a portfolio that tracks an index, the market, industry, or sector.
Small investors may not have the money to purchase all these securities and the transaction costs can be quite significant.
On the other hand, an investor can merely purchase an ETP tracking the securities it is looking to track.
This allows the investor to spread its risk, make a much smaller investment, and incur a fraction of transaction fees.
ETP Finance Takeaways
So, what does ETP stand for?
What is an ETP security?
How do you define ETP?
Let’s look at a summary of our findings.
ETP Exchange Traded Product
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