Types of ETPs

Exchange traded products (ETPs) traded on ASX generally fall into 3 categories: exchange traded funds (ETFs), exchange traded managed funds (ETMFs) and Structured Products (SPs).

ETFs and ETMFs are typically registered managed investment schemes (MIS) under the Corporations Act. Investors in an ETF or ETMF typically hold units in the MIS that operates the fund, with each unit representing a proportionate interest in a portfolio of assets held by the fund.

SPs typically represent contractual obligations of the issuer. With these products, investors don’t usually receive an interest in a 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 hold all, or a representative sample, of the assets of the benchmark they seek to track. Some ETF issuers however may choose to synthetically replicate the performance of the assets they seek to track, typically because the asset class of the ETF would be difficult or impossible to hold physically (e.g. crude oil ETFs). These ETFs can carry specific risks and are required to have the word ‘synthetic’ as part of their name. For information about the specific risks associated with synthetic ETFs, click here.

ETMFs can include actively managed as well as passively managed investments. They can also be constructed to achieve certain outcomes such as

  • Inverse exposure: some ETMFs seek to profit from or protect against a declining investment by seeking to generate returns that are negatively correlated to that investment. For information about the specific risks associated with inverse ETPs, click here.
  • Leveraged exposure: some ETMFs involve the fund borrowing or using derivatives in order to increase its exposure to an investment. For information about the specific risks associated with leveraged ETPs, click here.
  • Single asset exposure: other ETMFs provide exposure to a single specific security, bond or debenture. For information about the specific risks associated with single asset exposure ETPs, click here.

Some ETMFs may also choose to synthetically replicate the performance of the assets that they seek to track or outcome sought to be achieved. These ETMFs can carry specific risks and are required to have the word ‘synthetic’ as part of their name. For information about the specific risks associated with synthetic ETMFs, click here.

Some actively managed ETMFs do not publish information about the make-up of their portfolio as regularly as other ETPs. These funds use internal market making arrangements to achieve liquidity rather than more traditional external market markers. For information about the specific risks associated with these types of ETMFs, click here.

SPs typically do not invest in the underlying asset but rather they aim to replicate the performance of the asset synthetically. There can be many reasons why a product issuer will choose to do this. Most commonly it’s because it is impractical to hold the underlying physical asset, for example where it is a commodity such as wheat or oil. Synthetic replication is done by holding financial instruments, often a futures contract, to simulate the investment performance of the asset in question. For information on the specific risks associated with SPs click here.