Key takeaways
- ETPs are a broad category that includes ETFs, ETNs and ETCs, while ETFs specifically hold actual assets like stocks or bonds.
- ETFs offer diversification and lower fees, making them suitable for long-term growth, while ETPs, including ETNs and ETCs, provide exposure to niche markets or commodities.
- ETFs offer diversification, low fees, and ease of trading, whereas ETPs offer flexibility and access to niche markets such as commodities or specialized sectors.
- ETFs carry market risk based on the assets they track, while ETPs can introduce additional risks like issuer risk (ETNs) or price volatility (ETCs).
Whether you’re a new or experienced investor, the world of financial products can feel like a giant buffet — so many options, yet not all of them might suit your taste or goals. Two investment terms you’ll often hear are exchange-traded products (ETPs) and exchange-traded funds (ETFs).
At first glance, they seem similar, but like coffee and espresso, they have key differences that impact risk, returns and tax efficiency.
This article explains the differences between ETPs and ETFs, how these concepts apply to the crypto market, their pros and cons and how to choose between these two financial instruments.
What is the difference between ETPs and ETFs
The main difference between ETPs and ETFs is that ETP is a broad category, while ETF is a specific type of ETP.
- Exchange-traded products (ETPs): A broad category of investment products traded on stock exchanges. This includes exchange-traded funds (ETFs), exchange-traded funds notes (ETNs), and exchange-traded commodities (ETCs).
- Exchange-traded funds (ETFs): A specific type of ETP that holds actual assets, such as stocks, bonds or cryptocurrencies, and is structured as a fund.
Think of it this way: all ETFs are ETPs, but not all ETPs are ETFs.
Types of ETPs
ETPs come in different forms, each designed to expose investors to various asset classes. Here’s a breakdown of the main types and how they work in real-world investing:
- ETFs: These hold actual assets like stocks, bonds or crypto and trade like a stock. For instance, if you invest in an S&P 500 ETF like SPY, you gain exposure to 500 major US companies without picking individual stocks. Similarly, a Bitcoin ETF holds Bitcoin (BTC) on behalf of investors, allowing them to invest in the cryptocurrency market without handling wallets or private keys.
- ETNs: Unlike ETFs, ETNs do not hold actual assets. Instead, they are uncollateralized debt securities issued by banks, promising returns based on an index or asset price. For instance, a commodity ETN might track the price of oil without holding barrels of crude, just as a Bitcoin ETN tracks Bitcoin's price but does not actually own any Bitcoin. The risk here is that if the issuing bank fails, investors may lose their money, regardless of how the asset performs.
- ETCs: ETCs function similarly to ETFs but specifically focus on commodities like gold, silver or digital assets. A gold ETC is backed by physical gold stored in vaults, allowing investors to benefit from gold price movements without physically holding it. The same applies to Bitcoin ETCs, where the issuer holds Bitcoin in secure storage, letting investors gain exposure to cryptocurrency prices without dealing with direct ownership.
- Leveraged and inverse ETPs: Leveraged ETPs aim to multiply returns, offering 2x or 3x the daily performance of an index. Inverse ETPs, on the other hand, rise in value when the asset they track declines. For instance, if an investor believes the Nasdaq will surge, they might buy a 3x Nasdaq ETF, which amplifies gains (but also losses). Similarly, traders expecting a decline in Bitcoin’s price might invest in a short Bitcoin ETP, which increases in value as Bitcoin drops. These products are typically used for short-term trading rather than long-term investing due to their compounding effects over time.
Here is a summary of differences between the above types of ETPs:
Types of ETFs (a subset of ETPs)
Since ETFs are a specific type of ETP, they can be further categorized based on the assets they hold.
- Equity ETFs: An equity ETF is a type of investment fund that holds a diversified portfolio of stocks or cryptocurrencies and trades on a stock exchange. For instance, a blockchain-focused ETF invests in companies working in the crypto and blockchain industry rather than directly holding cryptocurrencies.
- Bond ETFs: These ETFs invest in government or corporate bonds, providing more stability than stocks. Investors looking for stability in a volatile crypto market might balance their portfolio with traditional bond ETFs.
- Commodity ETFs: Gold and silver ETFs track the price of these metals without requiring investors to store physical gold or silver. In the crypto space, Bitcoin futures ETFs track Bitcoin futures contracts rather than holding actual BTC, meaning their performance may not always match the spot price of Bitcoin exactly.
- Sector and thematic ETFs: Some ETFs focus on specific industries like technology or healthcare. A crypto industry ETF might invest in companies like Coinbase, mining firms or blockchain technology providers rather than cryptocurrencies themselves.
The comparison table below summarizes different types of ETFs, their risks, pros and cons:
ETP vs ETF investment strategies
When considering ETP vs ETF investment strategies, both offer distinct advantages based on investor goals. ETFs are commonly used for long-term growth and diversification, allowing investors to gain exposure to a wide range of assets, such as stocks, bonds or even sectors.
They are ideal for strategies focused on passive income generation through dividends or bond ETFs or for investors looking to track the performance of major indexes.
On the other hand, ETPs provide more flexibility and targeted strategies. With ETCs, investors can gain exposure to commodities like gold or Bitcoin, making them ideal for hedging against inflation or profiting from commodity price movements.
ETNs, on the other hand, offer access to niche markets or specific themes, such as technology or emerging markets, and are suited for thematic investing. Additionally, leveraged and inverse ETPs can amplify returns or profit from market downturns, appealing to those with a higher risk tolerance.
ETP vs ETF benefits
ETPs and ETFs both offer great benefits for investors. ETFs give you diversification by holding a mix of assets, like stocks or bonds, so you’re not relying on one investment. They’re cost-effective with low fees and are easy to trade on exchanges. Plus, ETFs are transparent, meaning you can easily track what’s inside.
ETPs, as a broader category, provide even more flexibility. Commodity ETFs and ETCs allow you to access markets like gold or Bitcoin without handling the physical asset. ETNs can provide access to more niche markets or indexes, like oil or emerging tech, often with lower entry costs than traditional investments.
ETPs vs ETFs risk factors
When comparing ETPs and ETFs, the key risk factors differ.
ETFs generally carry market risk since they track actual assets (like stocks or cryptocurrencies). Their performance is tied to the market, and prices can fluctuate. For example, if the crypto market crashes, your ETF could lose value. However, credit risk is minimal since ETFs hold the underlying assets.
On the other hand, ETPs can carry more risks. ETNs, for instance, are subject to issuer risk — if the issuing bank goes bankrupt, you could lose your investment, even if the asset (like Bitcoin or oil) performs well. The value of your investment depends not only on the asset’s performance but also on the financial health of the bank that issued the ETN.
In contrast, ETCs face price volatility based on the commodity they track, which can be volatile. For example, gold or Bitcoin prices can change drastically in a short period, meaning the value of your ETC can rise or fall quickly.
So, while ETFs focus on asset price risk, ETPs (especially ETNs) introduce more credit and price volatility risks.
Tax treatment of ETPs and ETFs
Regarding tax treatment, ETPs and ETFs are generally treated similarly, but there are some nuances. ETFs usually benefit from a tax-efficient structure. Since they trade on exchanges, investors can buy and sell shares without triggering capital gains taxes unless they sell for a profit.
ETFs often allow for in-kind transactions, meaning they can swap securities without triggering a taxable event. This makes them more tax-friendly for long-term investors.
ETPs, on the other hand, may have varying tax treatments depending on the type. ETNs are generally treated as debt securities, so they are taxed differently, and gains may be taxed as ordinary income rather than capital gains.
ETCs, particularly those tracking commodities, can have more complicated tax rules, as commodities themselves may be subject to different capital gains treatments.
Which is better: ETP or ETF?
As for which is better, it really depends on your investment goals. If you’re looking for diversification, lower fees and long-term growth, ETFs are often the better option.
If you’re after more niche investments (like commodities or specific themes) or looking for higher leverage, ETPs might offer more flexibility. Ultimately, it boils down to your investment strategy and risk tolerance.
There’s no single successful formula for investing. What works for one person may not work for another. Always take time to understand the strengths and limitations of each investment type. Successful investing is about being patient, strategic and adaptable to your needs.
As the saying goes, “It’s not about timing the market, it’s about time in the market.”
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.