Exchange Traded Products (ETPs) are baskets of stocks. ETPs are measured against stocks, commodities and indices. Exchange-traded products are traded on the stock exchange. ETPs have grown significantly since they were first introduced in 1993. Today, investors are using ETPs as another investment option. The most popular types of exchange-traded products are exchange-traded funds, exchanged-traded notes and exchanged traded commodities. Here is a closer look at the different types of exchange traded products.
Exchange Traded Funds
Exchange Traded Funds (ETFs) are commonly used by investors. Exchange traded funds can help investors diversify their portfolio. The S&P 500 is the first exchange traded fund and it was established in 1993. Today, there are hundreds of these funds in all sectors of the market. Investors can buy these securities on margin or short sell them. This financial instrument will typically hold securities that track an index. Exchange traded funds are similar to mutual fund. These funds are traded on the stock exchange like companies. Investors should keep in mind that the price of ETFs changes through out the day. Investors can purchase exchange traded funds through a broker. When the investors buy ETFs, they actually own that security.
Exchange Traded Notes
Exchange Traded Notes (ETNs) are unsecured debt notes. Investors buy these notes assuming that the debtor is going to pay the money back. ETNs are issued mainly by the Barclays Bank. This is a very powerful bank. It has about $1.5 trillion dollars in assets. Standard & Poor’s gave the company an “AA” credit rating. However, if this bank’s credit rating goes down to a “C”, the ETNs value will go down and the investors will lose money. ETN’s are more risky than ETFs. The investor does not get any principle protection unless that information is stated in the contract. There is always the possibility that the bank may not be able repay the investors. Basically, the investors are buying debt under a prepaid contract and they do not own any securities.
Exchange Traded Commodities
Exchange Traded Commodities (ETCs) are traded like shares on the stock market. The most common commodities are oil, energy, metals and food. This type of exchange-traded product is an alternative asset class that can be added to an investor’s portfolio. They are also sometimes called investment vehicles. ETCs are open-ended securities. Investors have the option to buy silver, crude oil, lean hogs, sugar, cotton or wheat. Traders can invest for the short-term or the long-term. Investors are buying and selling the commodities just like stocks. However, investors should be cautious because the value of the commodity goes up and it can come down.
Clearly, exchange-traded products are used as an investment vehicle to help investors make money. Investors must also take into consideration the risks and the tax implications. All investments carry a level of risk. On some investments, taxes may wipe out gains. Therefore, all investors should consult legal advice before investing money in exchange traded funds, exchange traded notes and exchanged traded commodities.