ETP vs ETF: Major Differences and Investment Benefits

Especially in the aspect of investing ETP vs ETF is terms that many inexperienced investors as well as the experienced ones will first consider when making an investment. Exchange traded products and exchange traded funds are some of the most flexible investment instruments available in the market that provide diversification and easy trading capability. 

But what are these products and specifically, what defines the differences between each? This post aims to explain to the readers what are exchange traded products, what is an exchange traded fund, and, finally, the main distinctions between exchange traded products on the one hand, and exchange traded funds on the other hand. 

At the end of it, you will be able to make better investment decisions based on which of the two options would be appropriate for your investment venture.

What Are Exchange Traded Products?

Exchange traded products (ETPs) may be categorized as any investment products that are listed for trading on an exchange rather like individual stocks. More particularly, ETPs can refer to three things, namely; Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), and Exchange Traded Commodities (ETCs). These products are meant to trade in proportion to an underlying asset, for instance, equities, fixed income securities, metals or futures contracts.

Another important characteristic of the ETPs can be regarded as their liquidity. 

As they involve exchanges, the investors are allowed to purchase or sell these securities during the trading session at market prices. This makes them appealing to those who seek to take advantage of the short-run or any market fluctuations and or those who wish to increase their sizes of the portfolio.

Suggested Read: ETP Vs. ETF Explained: Decoding The Major Differences

What Is an Exchange Traded Fund?

An ETF is a particular type of ETP whereby investors pool their money together in order to invest in a number of products with the pool of money they contribute. ETFs are also intended to mimic the performance of a given index, a sector, a commodity or any other category of assets. For instance, an S&P 500 ETF is an investment fund that is designed to track the trade of the Standard & Poor’s 500 index.

ETFs are viewed by investors for being relatively cheaper, tax-advantaged, and for transparency. It ensures that investors have an opportunity of diversifying their portfolio in various classes of assets without the need to directly buy each of the assets. This makes them an ideal investment for both the buy and hold investor as well as the trader.

ETP vs ETF Key Differences

Even though all ETFs are noted as ETPs, not all ETPs are ETFs in nature. This is one of the most basic differences, which one needs to know, when deciding between ETP and ETF. Let’s break down the key differences:

Structure and Composition

ETPs: This simply refers to Exchange Traded Funds; Exchange Traded Notes; and Exchange Traded Commodities respectively. Notably, all the types of ETP have their own structure. For instance, ETNs are debt securities that are sold by the financial institutions while on the other hand, ETCs offer a chance to invest in commodities.

ETFs: These are investment funds that cover a diversified portfolio of the instrument for investment including the stock, bonds amongst other investment tools. It is open-ended funds or unit investment trusts in nature.

Risk Profile

ETPs: The risk-of-return relationship also depends on the type of fund and the level of volatility it incurs. Thus, the credit risk involves the ETNs because they are debt securities and in the case of ETCs possible fluctuations in the price of commodities are considered.

ETFs: ETFs are subjected to market risks; therefore, their value changes with the market rates of the assets within the ETFs. However, they do not have credit risk as do the ETNs.

Tax Treatment

ETPs: Tax treatment varies by product. For instance, ETNs are taxed as ordinary income while ETCs can be taxed depending on the commodity they are linked to.

ETFs: ETFs are more favored than mutual funds mainly because of their tax efficiency. They usually provide lesser capital gains distributions than mutual funds, thus a suitable investment for the long term, tax-conscious investors.

Investment Objectives

ETPs: These come in handy in meeting every investment need of an investor from index tracking all the way to commodity or currency exposure.

ETFs: Most ETFs are linked with indices or given sectors, and therefore can be suitable for indexing.

Benefits of Exchange Traded Products

Learning about exchange traded products enables appreciation of their available benefits. Investing in ETPs contains the following advantages:

• Exchange traded products (ETPs) enable investors to access multiple asset classes thus helping them minimize the dangers connected to single investment choices.
• ETPs function on exchange platforms which allows investors to conduct transactions all through the trading hours to achieve fluidity in their investments.
• Exchange traded products provide daily public disclosure of their investments thereby enabling investors to view their asset composition.
• Exchange Traded Products provide investment opportunities that are both efficient in terms of costs because they carry lower expense ratios than mutual funds.

Benefits of Exchange Traded Funds

Exchange traded funds fall under the subset of ETPs and provide investors with advantages that have made them very popular. Exchange traded funds deliver three main advantages to investors which include:

• Exchange-Traded Funds provide good return on investment compared to actively managed funds because they maintain lower expense ratios.
• Exchange Traded Funds distribute capital gains minimally through their specific investment structure which creates a tax-efficient outcome.
• Exchange traded funds operate like stocks since investors can execute trading activities across the entire trading day.
• ETF ownership gives investors access to numerous assets which decreases their holding risk because of portfolio-wide diversified exposure.

Also Read: Understanding the key differences between bond funds and bond ETFs

Which One Should You Choose Among These?

Your investment decision between exchange traded products or ETFs should be based on your financial targets combined with your reluctance to risk and present market conditions. Several key points need evaluation for deciding between exchange traded products and ETFs.

Investment Objective: ETFs represent an easy affordable solution for monitoring indexes and sectors while remaining attractive compared to other options. Specializing in commodities and currencies calls for using ETPs like ETN or ETC products.

Risk Tolerance: ETFs typically present less risk than what other ETPs such as ETNs contain because ETNs involve credit risks. People who seek high returns against higher risks should explore additional ETP types beyond ETFs.

Tax Considerations: The benefit of tax efficiency which ETFs provide makes them appropriate choices for investors who hold their investments over extended periods. Before investing in an Exchange-Traded Product it is necessary to consult with a tax expert as their tax effects differ from one ETP to another.

Market Conditions: During uncertain market conditions ETFs that follow multiple index components deliver stability together with portfolio diversity. The specialized markets like commodities or currencies will benefit from different ETPs than ETFs.

Conclusion

People need to comprehend fundamental distinctions between Exchange-Traded Products and Exchange-Traded Funds to make effective investment choices. Exchange traded products and exchange traded funds provide separate benefits but they pursue different risk profiles and investment needs. Investors who want affordable index or sector investments through tax-efficient diversified portfolios should use ETFs. Specialized investments in currencies and commodities along with other assets are possible through the alternative ETPs consisting of ETNs and ETCs.

Research must be extensive and financial goals need evaluation before starting any investment. Investopedia provides comprehensive information about ETPs and ETFs through its guide but additional details can be found on Investopedia’s exchange traded products vs ETF page. By selecting an ETF or any other ETP your portfolio gains valuable benefits to establish diversity and resilience.