Assets of exchange traded products (ETPs) surpassed $1,000 billion near the end of 2009, up a staggering 45 percent year over year. After a drop in 2008, asset growth for ETFs and other exchange traded products (ETPs) has resumed, and assets of all ETPs globally exceeded the $1,000 billion milestone in 2009. There are now more than 2,600 ETPs, with some 4,800 listings on more than 40 exchanges from about 140 providers, and hundreds are currently in the planning stage. Moreover, ETPs now account for approximately 30 percent of the average daily volumes in US listed equities, and approximately 10 percent of European average daily volumes. ETP providers continue to launch products with new asset classes and market exposures, many of which are only tradable off exchange. Given the vast jungle of ETPs listed around the world, even professional investors are finding it difficult to distinguish between the various index-tracking products - all of which trade like single stocks on recognized exchange. At a very high level, it is important for investors to appreciate that there are basic structural differences between the various categories of exchange traded products. Some of the confusion, no-doubt, comes from various category acronyms that have developed among the product providers and market makers. Some would say it's a nightmare of acronyms - I would agree and have tried to provide an overview of the basics that have helped me distinguish the evolving ETP jungle. First, to distinguish, ETP (Exchange Traded Product) is essentially a general term to describe the combination of above exchange traded products. The sum of Exchange Traded Funds + Exchange Traded Notes + Exchange Traded Commodities = Exchange Traded Product universe. Let's start by looking at the most popular and recognized ETP, Exchange Traded Funds (ETFs). ETFs have been around longer than other ETPs, have a greater number of listings and more assets under management. It's an investment product which is legally structured similar to mutual funds, but trades like an individual stock on a stock exchange. The “F” is a key differentiator. Mutual funds are typically regulated by various securities agencies, have segregated liabilities independent board of directors and ring-fenced assets for the benefit of the funds' shareholders. Exchange Traded Notes (ETNs) are a relatively small part of the exchange traded product universe. An ETN is a debt security which is a direct obligation of the issuer. ETNs are sometimes backed with collateral that can be obtained in the event of the issuer of the ETN going into default and or bankruptcy. If an ETN issuer were to default and there was no collateral backing the ETN, the end shareholders of the ETN would be in the same position as other debt holders of the bankrupt company. Finally, the ETP family also includes Exchange Traded Commodities (ETCs). An ETC is a type of ETN that seeks to track the performance of a single commodity or several commodity indices. ETCs can be backed with physical commodities like gold bullion or hold listed futures contracts or total return swaps that are issued by investment banks. Futures or swap backed ETNs will not track spot commodity index prices, as their underlying indices are calculated on rolling commodities futures contracts. The upshot of the diversity among ETPs, is that every index product trading on-exchange is not an ETF. There are significant counterparty and structural difference between various ETPs as noted above, however, investors need to read the prospectuses and or contact the issuers before deciding on which type of ETP might be most appropriate. Gulf-based professional investors have used ETPs for years, based on their various portfolio needs, but ETCs have seen most media mileage specifically as it relates to gold. In fact, the first locally listed Exchange Traded Product was a gold ETC. The consistent coverage on gold ETPs has led to greater recognition of the product category and we have now seen the recent launch of ETFs in Abu Dhabi and Saudi Arabia. I fully expect the growth and maturation of the ETP sector in the region in the coming years. - The writer is vice-president, iShares - a global product leader in exchange traded funds. __
