ETPs, what they are, types and how they work

When it comes to investing, Exchange Traded Products (ETPs) are increasingly popular financial instruments among traders, thanks to their flexibility and accessibility. In 2025, the global ETP market is expected to surpass $10 trillion in assets under management (AUM), a significant milestone that demonstrates the exponential growth of this segment. According to a report by BlackRock, the average annual compound growth of ETPs has been 15% over the past five years.

Let’s see in detail what are Exchange Traded Products (ETPs) and how do they work, but, above all, let’s know the advantages that this type of investment, which seems to be increasingly successful, entails, and the related risks.

What are ETPs? Meaning and definition

Exchange Traded Products (ETPs) are a category of financial instruments traded on exchanges that replicate the performance of an underlying asset or a set of assets, such as indices, commodities, currencies or baskets of securities. ETPs are designed to offer investors an efficient and transparent way to access a wide range of financial markets without having to directly purchase the underlying assets.

The distinctive feature of ETPs is that they are listed on regulated markets, which means that they can be bought and sold like shares during trading hours. This makes them particularly liquid and accessible compared to other investment instruments such as traditional mutual funds.

ETPs can be divided into several main categories, including Exchange Traded Funds (ETF), Exchange Traded Notes (ETN), and Exchange Traded Commodities (ETC). Each type has unique characteristics that make it suitable for different investment needs and strategies.

A key point to understand is that ETPs are not actively managed. This means that their primary objective is to closely replicate the performance of a benchmark rather than trying to outperform it.

For example, an ETF on the S&P 500 index will replicate the performance of the index, giving investors diversified exposure to the US stock market.

According to Morningstar, the number of ETPs available on the global market will reach 9,500 in 2025, up from 7,000 five years ago. This increase reflects not only growing demand from investors, but also the expansion of supply by issuers to cover new market segments and emerging asset classes.

The difference between ETPs and mutual funds

As mentioned, ETPs were developed with the aim of creating investments with greater flexibility than mutual funds. Mutual funds are funds made up of a basket of securities, financed by a group of investors and managed by professional managers.

Typically, the quote of mutual funds is updated at the end of the trading day, while ETPs operate like stocks and can be bought and sold throughout the day. An investor can place a buy or sell order on an ETF at a price that varies over time throughout the trading session through a broker. Investors can buy an ETF in the morning and sell it by the end of the day, while mutual funds do not have this flexibility. ETPs have lower costs than mutual funds.

ETPs require an investor to have a trading account through a broker, so buying and selling ETPs may incur brokerage fees. Additionally, differences in the bid and ask prices of a security can increase the cost of trading ETPs. Some “no-load” or “no-fee” mutual funds, on the other hand, can be bought and sold without trading commissions, and do not require a trading account through a broker.

How ETPs work

ETPs work on a simple but effective basis: replicate the performance of the underlying asset through a combination of financial instruments and strategies. When an investor buys an ETP, he is not directly purchasing the underlying assets, but a share of an instrument that reflects their performance.

The return that can be obtained with this way of trading will have an equal value. Obviously, the revenues cannot exceed those of the market in which you are investing.

ETPs are listed in the same way as any other financial security and during the day the price variations are updated in real time. You can operate with this method by inserting the stop-loss to the orders or by setting an entry limit.

ETPs operate through two main mechanisms:

• Creation and Redemption: ETP issuers work with Authorized Participants (APs) to create or redeem shares based on market demand. For example, if demand for an ETF increases, the issuer will issue new shares by purchasing the underlying assets or using derivatives;
• Arbitrage: Thanks to exchange trading, the price of an ETP tends to stay in line with the value of the underlying assets through arbitrage. If the market price of an ETP is higher than its intrinsic value, APs can create new shares and sell them for a profit, and vice versa.

These mechanisms ensure that ETPs are transparent and cost-efficient instruments. However, it is important to consider the Management Fees (TER) and Trading Costs, which can vary significantly depending on the type of ETP.

The three types of ETPs

As anticipated, ETPs are mainly divided into three categories: ETFs, ETNs and ETCs. Each of these types has specific characteristics that make it suitable for different investment strategies.

Exchange Traded Funds (ETFs)

ETFs are perhaps the best-known form of ETPs. These instruments replicate a specific index, such as the NASDAQ-100 or the FTSE MIB, or a sector, such as energy or technology.

ETFs are composed of a basket of securities that follow the underlying benchmark, ensuring diversified exposure.

ETFs can be physically or synthetically replicated. Physically replicated ETFs actually buy all or part of the index assets, while synthetically replicated ETFs use derivatives to replicate the performance of the index. According to a report by State Street Global Advisors, physically replicated ETFs will represent 70% of the total ETF market in 2025.

Exchange Traded Notes (ETNs)

Like ETFs, Exchange-Traded Notes (ETNs) also track an index or other underlying securities traded on financial markets. However, ETNs are debt securities that pay investors the return on the index they track at the maturity date specified at the time of purchase.

ETNs are similar to bonds in that investors are paid their original investment, or principal, at maturity, but no interest is paid.

Furthermore, investors who buy an ETN do not actually own any of the securities included in the index they track. As a result, the likelihood that investors will see their invested capital repaid and the returns derived from the underlying index depends on the reliability of the issuer.

Exchange Traded Commodities (ETC)

ETCs offer direct exposure to commodities, such as gold, oil or natural gas. They can be physically backed, in the case of precious metals, or based on derivative contracts for other commodities.

According to the World Gold Council, gold ETCs recorded a 12% increase in AUM in 2024, a sign of investors’ interest in safe-haven assets.

Advantages and risks of ETPs

One of the advantages is certainly the costs, which are far lower than other investment methods.
In fact, if you had wanted to invest in different stocks, you would have had to pay a commission for each open position.

Obviously, there are also disadvantages in this type of investment. In fact, the trader cannot create an ETP at his own discretion, but must use a basket that has already been created.

This means following in a passive way the performance of positions that have not been personally chosen.

The impossibility of modifying the instruments with which one operates leads many investors not to bet on this type. Whether or not to invest in ETPs depends largely on the trading plan that each has created.

Advantages of ETPs

• ETPs offer investors access to investing in many stocks and indices.
• ETPs are usually a low-cost alternative to mutual funds and actively managed funds.
• Many ETPs, especially ETFs, are growing in popularity, which allows investors to buy and sell them easily.

The risks of ETPs

• ETPs like any financial security can carry the risk of losses as prices are constantly fluctuating;
• Not all ETPs are the same as some behave like debt instruments, such as ETNs.
• ETPs have become popular, but investors should always monitor trading volumes to ensure they can buy and sell them easily.

Original article published on Money.it Italy. Original title: ETP, cosa sono, tipologie e come funzionano