About Exchange Traded Products

Exchange Traded Products (ETPs) is the family name for the group of products comprising Exchange Traded Funds (ETFs), Managed Funds (MF) and Structured Products (SPs).  There are over 90 ETPs accessible through ASX.

Exchange Traded Products are financial products traded on an exchange that invest in or give exposure to securities (shares) or other assets such as commodities. Most ETPs generally seek to track the performance of a specified index or benchmark (such as the S&P/ASX 200 index) or a currency such as the USD or a commodity such as gold.

ETPs are open-ended, which means that the number of units on issue is not fixed but can increase or decrease in response to demand and supply from investors. This assists in ensuring that the ETPs trade at or near their net asset value (NAV).  ETPs trade, clear and settle in the same way as shares on the ASX.

ETPs can offer exposures across a range of asset classes including;

Types of ETPs

ETFs and MFs are typically registered managed investment schemes (MIS), SPs typically represent contractual obligations of the issuer. Investors in an ETP structured as a MIS hold units in a unit trust rather than shares in a company that operates the investment fund. Each unit represents an interest in a portfolio of assets held by the ETP. Alternatively for SPs which represent contractual obligations of the issuer, investors may not receive an interest in the portfolio of assets held by the SP but instead rely on rights against the issuer of the SP under the terms of issue of the SP.

ETFs are typically passive index tracking investments and in most instances are either physically backed or adopt a representative sampling approach. ETF issuers may also alternatively choose to synthetically replicate the performance of the assets that they seek to track. Such ETFs can carry specific risks and would be identified as they are required to have the word ‘synthetic’ as part of their naming convention.Specific details regarding the risks of synthetic ETFs is available.

Managed Funds, that are considered part of the ETP family, can include actively managed as well as passively managed forms of investments. These Managed Funds can be constructed to achieve a certain outcome such as the BetaShares BEAR fund that is designed to generate returns that are negatively correlated to the returns of the Australian share market (as measured by the S&P/ASX 200 index).

Managed Fund issuers may choose to synthetically replicate the performance of the assets that they seek to track or outcome sought to be achieved, rather than being physically backed or adopting a representative sampling approach. Such Managed Funds can carry specific risks and would be identified (if they were available on ASX) as they are required to have the word ‘synthetic’ as part of their naming convention. Specific details regarding the risks of synthetic Managed Funds is available.

Structured Products typically do not invest in the underlying securities / asset but rather they aim to replicate the performance of the index or benchmark synthetically.There can be many reasons why a product issuer will choose the synthetic replication approach. Most commonly it’s because it is impractical to invest and hold the physical security notably when the underlying security is a commodity such as wheat or oil. Synthetic replication is done by holding financial instruments, most likely a futures contract, to simulate the investment performance of the index or benchmark for the whole fund. More information on the specific risks of Structured Products is available.

Benefits of ETPs

•Buy / sell flexibility. ETPs are traded on the ASX and this means that you can buy and sell during ASX's trading hours. This means you can enter and exit an investment in an ETP as you would a share with a corresponding three day settlement period.

•Diversification. ETPs can help you diversify your portfolio across markets or asset classes that otherwise could be difficult for investors to access. For example, there are ETPs that cover emerging markets, specific market sectors, government and semi-government bonds, commodities and currencies.

•Lower cost. ETPs are typically able to achieve lower operating costs, the management fees (commonly referred to as MERs or Management Expense Ratios) can be significantly lower than other forms of professionally managed investments.

•Returns from capital appreciation and income. ETPs will change in value as the underlying asset or assets change in value. Depending on the type of product and the benchmark being tracked, investors can earn returns through capital appreciation and/or distributions. Investors may also enhance after tax returns from franking credits.

•Fair value. ETPs are designed to ensure that they trade close to their underlying value. This provides the investor with certainty that the on-market price will closely reflect the value of the underlying assets held in the ETP. This is commonly referred to as trading at net asset value (NAV). Taxation advantages. The turnover of the underlying portfolio tends to be low with the constituents of equity ETPs changing only when there is a rebalance of the index. This means that the level of capital gains tax that needs to be paid by the fund and its investors can be greatly reduced.

ETP Risks

•Market risk - market conditions (for example, lack of liquidity) may make it difficult to buy or sell ETP in certain circumstances.

•Tracking error - the return on the portfolio may deviate from the return on the index or benchmark tracked.

•Exchange rate fluctuations - ETPs which seek to achieve the same return as a particular overseas market index or benchmark, and are traded and settled on ASX in Australian dollars, may be exposed to additional risks. If the ETP is not hedged against currency risk, fluctuations in the exchange rate can affect the value of the portfolio. Additionally, there may be political risks in the home country of the overseas market or benchmark which may also affect the value of the portfolio.

•Taxation outcomes - there may be different taxation outcomes for investors in synthetic ETPs when compared with direct replication ETPs, depending on whether any gains or losses in the ETP are achieved through holding the assets that make up the index or benchmark or are achieved through the derivative exposure. Any different taxation outcomes may significantly impact the effective return for investors.

•Use of derivatives and counterparty risk - ETPs that use derivatives could cause the ETPs to incur losses. Some ETPs for example may use over the counter (OTC) derivatives, which are not subject to central counterparty clearing arrangements. Central counterparty clearing arrangements, where available, help to mitigate counterparty risk

Specific Fixed Income ETP Risks

There are a number of specific risks associated with investment in fixed income ETPs. These risks may result in different investment returns and a loss of income or capital value. Some of the risks include; 

Interest rate movements - affect the income earned by the underlying bonds of the ETP. Falling interest rates can lead to a decline in income for the fund while an environment of rising interest rates can lead to the price of the bond falling.  

Credit risk – refers to the risk that the issuer of the bonds may fail to pay interest and principal. Typically those bonds issued by the Commonwealth and State Governments carry lower credit risk than other fixed income securities.

Distributions risk - there is no assurance that an ETP will pay a distribution. Each ETP is reliant on the receipt of coupons and income from its underlying holdings.

Taxation risk - the taxation treatment / outcomes may be different to other asset classes such as shares

Things to Consider Before Investing

As with other products, it is important to read the product disclosure statement for ETPs to gain an understanding about an ETP’s structure, investment objectives, principal investment strategies, risks, and costs. You should do this before you make a decision to invest or not. You can find the product disclosure statement on the website of the ETP issuer.

You should also consider seeking the advice of an investment advisor who holds an Australian financial services (AFS) licence or is a representative of an AFS licensee. Be sure to work with someone who understands your investment objectives and tolerance for risk. Your investment advisor should understand these products, be able to explain whether or how they fit with your objectives, and be willing to monitor your investment alongside you. The ASX find a broker service may assist you in locating an investment advisor in your area.

Market Making

Market Makers provide an important role in ensuring that buyers and sellers of ETPs can transact. They provide liquidity to the market by providing quotes through the trading day and update their prices to reflect changes in the underlying securities.

ASX offers a Market Making incentive scheme to further promote tighter spreads and more liquidity in ETPs markets. Market Making Participants receive Trading and Clearing Fee incentives from ASX when achieving minimum quoting benchmarks on a monthly basis. Each ETP is assigned a spread and liquidity requirement.

The table found in the following PDF (80KB) shows the Market Makers (MM) that have signed incentive contracts with ASX and the relevant ETPs.