Exchange-Traded Products Overview
Before diving into the specific types of ETPs, it helps to understand what makes these products different from traditional mutual funds.
What Are Exchange-Traded Products?
- Exchange-traded products (ETPs) are investment products that trade on stock exchanges throughout the day, just like individual stocks
- Two main types: Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs)
- ETPs offer an alternative to mutual funds with key structural differences in trading, fees, and tax efficiency
How ETPs Trade
- Priced continuously during market hours (unlike mutual funds, which are priced once daily at net asset value (NAV))
- Can be bought and sold at market price at any point during the trading day
- Can be purchased on margin and sold short - just like stocks
- Subject to bid-ask spreads (the difference between the buy and sell price)
Think of it this way: Buying a mutual fund is like ordering from a menu with one price set at closing time. Buying an ETP is like shopping at an auction where prices change by the second and you can walk away, use credit (margin), or even bet that prices will drop (short selling).
| Feature | ETPs | Mutual Funds |
|---|---|---|
| Pricing | Continuous (real-time market price) | Once daily (at 4:00 PM NAV) |
| Trading | Buy/sell anytime during market hours | Orders executed at end-of-day NAV |
| Margin purchases | Yes | No |
| Short selling | Yes | No |
Exam Tip: Gotchas
- ETPs trade at market price throughout the day; mutual funds are priced once per day at NAV. If a question asks about intraday trading, the answer points to an ETP, not a mutual fund.
- ETP market price can differ from NAV. Unlike mutual funds (which always transact at NAV), an ETP's market price may trade at a slight premium or discount to its underlying net asset value.