Types of ETPs
Exchange traded funds (ETFs) and managed funds (MFs) are typically registered managed investment schemes (MIS). Structured Products (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 are 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 certain outcomes such as
- Inverse Exposure - some managed funds seek to profit from or protect against a declining investment by seeking to generate returns that are negatively correlated to that investment. Specific details regarding the risks of inverse ETPs are available.
- Leveraged Exposure - some managed funds involve the fund borrowing in order to increase its exposure to an investment. Specific details regarding the risk of leveraged ETPs are available.
- Single Asset Exposure - other managed funds provide exposure to a single specific security, bond or debenture. Specific details regarding the risk of single asset ETPs are available.
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 are 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 are available.