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Types of ETPs

Exchange traded funds (ETFs) and managed funds (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 structured products (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.

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