Co-founder and CEO of ETP provider Boost ETP Nik Bienkowski looks at the burgeoning ETP market over the last 20 years.
[This article previously appeared on our sister site, IndexUniverse.eu.]
The world's largest exchange traded fund (ETF) -- the SPDR S&P 500 -- celebrated its 20th anniversary this year. It heralded two decades of the exchange traded product (ETP) industry, a market that has grown to assets of over $2 trillion.
ETPs have been in existence for more than twenty years now. The world's most well-known ETP, the SPDR S&P 500 ETF, launched on January 29, 1993 with just $6.5 million in assets under management (AUM) it now has more than $120 billion AUM, with an average daily trading volume of nearly $20 billion, according to State Street Global Advisors.
The ETP market has come a long way in the past twenty years: It now covers a wide variety of asset classes, structures and strategies. ETPs now provide tools to the passive and active investor. For example:
- They cover a wide range of asset classes including many that had been difficult to invest in, such as emerging markets, commodities, currencies, hedge funds and other alternative investments.
- ETFs have moved on from offering plain vanilla un-leveraged exposure tracking passive indices to offering 'active' exposure either through an active ETF or smart-beta index, or more directly by using an investor's own skills through the use of leverage and short ETPs.
- A range of exchange traded structures have been developed including: (i) funds called ETFs and (ii) notes called exchange traded commodities (ETCs) or exchange traded products (ETPs) which track other asset classes.
- ETPs can gain their exposure through physical replication by holding the underlying index assets, or synthetically replicated through the use of derivatives and swaps in order to gain access to difficult and/or alternative markets.
With the number of potential ETP investment opportunities and tools continually increasing, the investor is now able to maximise the opportunities for diversification, hedging, or targeting higher returns through active and alternative ETPs.
ETPs versus mutual funds and how ETPs have become the benchmark
ETPs are similar to mutual funds, they are open-ended and can provide diversified exposure to a range of indices in one single trade.
The main benefit of ETPs was enabling intraday trading - most mutual funds could only be traded daily at the end of the day. In addition, to purchase a mutual fund, an investor had to complete an application form. Once approved, they would purchase units at the then, end of day price while paying large up-front commissions (and exit charges) to the distributor. By bringing ETPs on exchange, the investor could now access real time pricing, through a stock exchange, with no up-front commissions other than execution / brokerage fees.
ETPs also tend to be low cost market access instruments to all investor types from retail to professional. Interestingly, the ETPs which benefit most over mutual funds from intra-day trading are those geared towards more short term trading or tactical uses, including leveraged and short ETPs, which are a more recent phenomenon.
ETPs have now become the benchmark for the mutual fund industry since ETPs are cost-effective and extremely transparent. It has prompted ETP providers to go into greater detail to disclose their investment and operational methodologies in order to educate investors.