What are ETFs，ETPs，ETNs？

25 February 13:43

[TL;DR]

What are ETFs? Exchange Traded Funds, funds that trade in stock exchanges and follow a particular market Index - they are mostly compiled of several different stocks under a single investment title. Instead of investors having to pick several companies at once, they simply invest in an ETF and its management does the work for them.

What are ETPs? Exchange Traded Products, much like ETFs but open to way more options - commodities, currencies, bonds, interest rates, debt and more. The first exchange-traded product in the world was Bitcoin, by Wisdom Investment Tree.

What are ETNs? Exchange Trade Notes, the most volatile of the three, are stock-traded offerings of complex products to non-professional investors. Unlike ETFs and ETPs, ETNs don’t provide security ownership of the products. Instead, investors receive the returns that a particular index produces. It is therefore much riskier than the former options, as there is no guarantee investors will receive the full amounts that are owed to them.

If you have been in the crypto or traditional finance markets for long enough, you have most likely heard of these terms. News about companies X Y or Z wanting to open a Bitcoin ETF, another organization opening the first ETP in Europe, research regarding crypto ETNs, the list goes on.

Outside of the crypto market, these investment options are a great way for investors to tap into different markets and commerce categories without having to select particular assets or companies that they wish to follow. It’s an easier, hassle-free way of getting into investments without having to commit too much research into what each particular segment represents.

But what exactly do these terms mean, what are their advantages and how are they used by investors and companies in the financial market? In this article, we explain the meaning of the financial terms ETF, ETP, ETN.

What is an ETF?

An ETF is nothing more than an investment fund traded in one or more exchanges, which is why it holds the name Exchange Traded Fund. Therefore, it represents a communion of investors that apply their resources together. It possesses some unique characteristics that distinguish it from traditional funds and regular stocks that only represent one company.

Firstly, Exchange Traded Funds are always pegged to a reference Index. This means that the investment company or group that manages the ETF makes sure to structure the fund in a way that is as closest as possible to the Index. Take an ETF that’s pegged to the Nasdaq Index, for instance. The manager’s role, in this case, is to use the investors’ resources to buy the same stocks that are included in that Index portfolio, around the same proportion.

Also, as the name suggests, ETFs are negotiated in stock exchanges as if they were regular stocks. Their performance oscilates as the several stocks attached to the Fund oscilate too, also corresponding to the old supply and demand framework that affects every item listed across the stock markets.

ETFs are extremely popular in the US and have gained much more popularity in the past decade and a half as tech stocks skyrocketed, as investors who are not savvy in technology or innovation preferred to invest in tech ETFs that contained several different companies than hand-picking them one by one.

It’s also a relatively new fund item, too. Although the very first ETF was created by Standard & Poors’ in 1993, the first actively-managed ETF came 15 years later - in March of 2008, through Bearn Sterns Current Yield ETF. As of January 2022, it was estimated that there were more than 7.6 thousand globally active ETFs. The country with the most ETFs per capita is the United States, with over 2.2 thousand Exchange Traded Funds.

What is an ETP?

An abbreviation of Exchange Traded Products, ETPs are investment vehicles that can be formed by commodities, exchange markets, stock prices or interest rates.

The value of this financial asset is defined by such vehicles. Therefore, ETPs work as a reference for the market of that particular asset class and possess intra-daily transactions available.

The application mechanism and withdraw styles are the main characteristics that distinguish ETPs from products like ETFs and traditional funds. That’s because the investor doesn’t need to get in touch with the bank or an administrative representative of the investment portfolio to authorize the application or withdrawal of the investment. In an ETP, the investor conducts their own operation, buying or selling. Therefore, ETPs function very similarly to stocks but also being able to track different types of products.

Similarly to ETFs, ETPs also peg their pricing reference to a particular Index. Worldwide, there are three main organizations that calculate financial indexes adopted by ETPs. Tey are Barclay’s Capital, MSCI and Standard & Poors’.

Crypto ETPs
Besides commodities, currency exchanges, stock prices or interest rates, the ETP market has also given a lot of attention to one particular asset class that has taken the world by storm over the past decade: cryptocurrencies. In the United States’ New York Stock Exchange (NYSE), for instance, Wisdow Tree INvestments starting offering their first stock exchange-supported ETP in Bitcoin.

This first step of cryptocurrencies in stock markets takes away what makes digital assets a bit more complicated than other investments, such as the use of digital wallets, keyphrases and KYC for crypto-exclusive platforms. With crypto ETPs, and most recently crypto ETFs, investors can get in touch with the area very easily.

What is an ETN?

The most volatile and risky Exchange Traded section of this list, Exchange Traded Notes are relatively unknown types of stock-traded assets. They were firstly developed by Barclay’s Bank back in 2006, with the goal of facilitating access of difficult investing instruments to non-professional investors.

ETNs, much like ETFs and ETPs, were developed to monitor a particular market index. In almost all ETN cases, they are not guaranteed ownership like their siblings. Instead, ETN investors are paid the returns that the Index produces intead of actually owning the assets as securities. This type of investment style creates a much higher risk to the investors, once there is no guaranteed that they will emburse the full amounts that are owed to them. However, unlike other options, ETN investors do not have to pay interest rates.

In the United States, each ETN is obligated to launch coupled with a KID, or Key Information Document. Also known in other regions as an Information Memorandum, it lets investors know the full characteristics of the Note - manager, licensee, acompanying rates and Indexes, periodical fees and more.

Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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