Exchange-Traded Products

Exchange Traded Products (ETPs) usually follow the price movements of a financial index or benchmark (e.g. the FTSE 100) and can offer an alternative way to gain exposure to a wide range of markets, without incurring all of the costs of investing directly.

What is an ETP?

There are 3 types of ETP:

  • The most common type of Exchange Traded Product that tracks a sector, market or index is an ETF
  • Traded like equities
  • Real time exposure to an asset class, region, country or business sector
  • Comply with EU rules for investment funds providing investors greater protection – UCITs compliant
  • To trade ETFs you may need to complete an appropriateness assessment
  • Track commodity indices, such as metals, natural energy resources, agricultural produce or livestock
  • Trade on a listed stock exchange
  • Do not comply with EU rules for investment funds and as such, provide less investor protection – non UCITs compliant
  • To trade ETCs you may need to complete an appropriateness assessment
  • Unsecured debt obligations typically issued by a bank or other financial institution
  • Pay an amount determined by the performance of the underlying index or benchmark
  • Can be traded on exchanges similar to equities or ETFs
  • Do not hold assets to replicate the performance of the underlying index. They can be complex and include the risk that the issuer may default on the note
  • Do not comply with EU rules for investment funds and as such, provide less investor protection – non UCITs compliant
  • To trade ETNs you may need to complete an appropriateness assessment

What are the benefits of trading ETPs?

  • Diversification – Invest over a whole market index or sector, spreading risk and increasing access to a range of securities.
  • Choice – Easily adjust your trading strategy with access to different global markets and asset classes like cash, equities or commodities.
  • Convenience – Simple to trade and priced like shares. You can also easily track performance and movements in price during trading hours.
  • Costs – As ETFs aren’t actively managed so fees are typically lower than Investment Funds. There's also no stamp duty to pay. You can buy ETFs on our standard online commission rates £5.95 - £12.50. See our rates & charges page for more.

Understanding the risks

Tracking error is the difference between the performance of the ETP and the investment it tracks. Tracking error depends on the market conditions at the time and can either be in the client's favour or against them.

Certain ETPs use complex financial products such as swaps (see synthetic ETP for details), futures and options with other third party counterparties rather than purchasing the assets themselves to achieve investment performance. If the investment bank providing these complex products fails, the ETP may lose a part or all of the funds they had invested. Investors should consult the ETP's prospectus to understand the Counterparty risk associated with the product.

In certain circumstances, it may be difficult for an ETP to trade particular investments within a reasonable time at a fair price, which may reduce the ETP's returns. Also, during periods of reduced market liquidity or in the absence of readily available market quotations for particular investments in the ETP's portfolio, the ability to produce an accurate daily value to these investments may be difficult.

ETP providers can generate further revenue by lending their holdings (collateral) out to other third party institutions, such as investment banks. If these third parties fail and the holdings are unable to be recovered, investors could suffer a potential loss. Different ETPs have different exposures to stock lending and the ETP prospectus should be consulted to determine the Collateral Policy for that product.

If the ETP's underlying holdings are in a currency different to the denominated currency, investors will be affected by fluctuations in foreign exchange rates. We may receive two elements of commission in relation to International Dealing, trading commission and/or FX charge.  Please see our Rate Card for full details of the relevant costs.

The more an ETP invests in leverage derivative instruments, the more this leverage will magnify any losses on these investments. For leverage index-based ETPs, the value of the ETP's shares will tend to increase or decrease more than the value of any increase or decrease in its underlying index. ETPs that offer leverage are highly complex financial instruments with a high degree of risk and are not suitable for all investors. Investors should carefully consult the prospectus before investing so they understand the risks associated with these products before trading.

To the extent that an ETP's Underlying Index or portfolio is concentrated in the securities of a particular market, country, industry, sector or asset class, the ETP may be adversely affected by the performance of those securities, subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that particular market, country, industry, sector or asset class.

The tax treatment of an ETP is determined by your individual circumstances and the continued status of the ETP. The returns from trading ETPs could be subject to income tax rather than Capital Gains Tax. If you are unsure whether an ETP is suitable for your own individual circumstances you should consult a qualified tax advisor

ETPs can use financial techniques; some of which may be complex in nature and involve leverage, shorting or a high degree of volatility; meaning that these types of products may not be suitable for all investors. The value of an ETP is not guaranteed and can go down as well as up and you may get back less than you invested. If you are unsure of their suitability please seek independent financial advice. The protections available under the Financial Services Compensation Scheme (FSCS) may not be available for all types of ETPs domiciled outside of the UK.

Before you invest in an UCITS ETF you should make sure that you read the Key Investor Information Document (KIID) and Key Features Document (KFD) or other supporting information. For other types of ETP you should make sure that you read the Prospectus for the ETP you are intending to invest in, to make sure that it fits in with your investment goals.