Introduction

As investment markets continue to evolve, Exchange Traded Funds (ETFs) have become one of the most sought-after products in the financial market. Combining the advantages of open-ended funds and stocks, ETFs have captured the attention of a wide range of investors. In January 2024, spot Bitcoin ETFs were officially launched in the United States, followed by spot Ethereum ETFs in the third quarter of the same year, further propelling the development of cryptocurrency ETFs.

However, when investors search for suitable investment tools, they may encounter terms like ETP and ETN, often leading to confusion about how these differ from ETFs. ETP (Exchange Traded Product) is a broader concept encompassing various products tradable on exchanges. Its convenience and accessibility have made it an essential tool for new asset classes (including cryptocurrencies) and investment strategies.

This article comprehensively analyzes common financial products, including ETFs, ETPs, and ETNs. We’ll delve into their differences, characteristics, and advantages and disadvantages. Whether you’re a newcomer to cryptocurrency investments or a seasoned investor looking to expand your market knowledge, you’ll discover valuable insights and references here.

Understanding ETPs and ETFs

In the financial market, ETPs and ETFs are two investment instruments investors favor. Both attract numerous investors with flexibility and transparency, but they differ in structure.

ETP (Exchange Traded Products)

ETP is an umbrella term encompassing various financial products that can be listed on exchanges and traded like stocks. The value of these products is typically linked to the performance of specific assets or a basket of assets. ETPs can track price movements of assets ranging from stocks and bonds to commodities and cryptocurrencies. ETP types include ETFs (Exchange-Traded Funds), ETNs (Exchange-Traded Notes), ETCs (Exchange-Traded Commodities), and more. ETPs repackage the value of underlying market assets and list them on exchanges, allowing investors to participate in diversified asset investments at lower costs, achieving asset securitization and public trading.

Note: Although “ETP” is the general term for these products, it is sometimes also used to refer specifically to exchange-traded debt securities.

ETF (Exchange-Traded Funds)

ETFs are a special form of ETP. An ETF is an investment fund issued by investment trust companies, designed to track the performance of a specific index, industry, or asset portfolio. ETFs typically contain multiple assets held and managed by the fund company. Investors indirectly hold these assets by purchasing ETFs. ETFs are characterized by “passive management, pursuing index returns,” which is one of the reasons for their popularity among stockholders. The performance of an ETF usually depends on the performance of its tracked index components and their weight adjustments.

The Evolution of ETFs

ETF Development Process

The concept of ETFs (Exchange-Traded Funds) was introduced by John Bogle in the 1990s, aiming to “securitize indices” and enable investors to engage in passive investing at lower costs. The origin of ETFs can be traced back to 1989 with the launch of Index Participation Shares, designed by the American Stock Exchange and Philadelphia Stock Exchange to track the S&P 500 index. However, this product was discontinued shortly after its sale due to litigation from the Chicago Mercantile Exchange.

In 1993, the world’s first ETF - S&P 500 SPDR (SPY) - was officially issued. This fund, tracking the S&P 500 index, quickly became one of the largest ETFs globally. In 1996, iShares launched the first international ETF, covering market indices of multiple countries, further expanding investors’ options.

Over time, the types and numbers of ETFs rapidly increased. In 1998, State Street Global Advisors introduced “Sector Spiders,” tracking nine sectors of the S&P 500 index. In the same year, the SPDR Dow Jones Industrial Average ETF, DIA, was launched, specifically tracking the Dow Jones Industrial Average. In 1999, QQQ, aimed at replicating the performance of the Nasdaq 100 index, was listed. In 2000, Barclays Global Investors launched the iShares series of ETFs. Vanguard Group entered the market in 2001, introducing renowned products such as the Vanguard Total Stock Market ETF (VTI). In 2002, iShares issued its first bond-based ETF, further expanding the application scope of ETFs.

At the beginning of the 21st century, the ETF market continued to develop rapidly, covering an increasing number of asset classes, including bonds, industries, regions, commodities, and other specialized indices. Currently, there are over 2,000 ETFs issued in the United States. As more ETFs are tailored to specific markets and asset classes, ETFs have become a primary choice for global investors as flexible and efficient investment tools.

Bitcoin-related ETFs

Since 2013, multiple companies have submitted applications for listing cryptocurrency ETFs, including Grayscale Investments, which has repeatedly attempted to convert its Bitcoin Trust Fund GBTC into a “Bitcoin Spot ETF,” but has been rejected multiple times by the U.S. Securities and Exchange Commission (SEC).

Although Bitcoin spot ETFs have garnered significant attention in the market, the United States was not the first country to launch such products. As early as June 2020, investment company ETC Group launched the world’s first Bitcoin spot ETF - ETC Group Physical Bitcoin - in Germany.

Bitcoin ETFs can be divided into two types: Bitcoin futures ETFs and Bitcoin spot ETFs. Since 2021, Bitcoin futures ETFs have been listed in the United States. These funds track the prices of Bitcoin futures contracts rather than holding actual Bitcoin, with investors essentially betting on future Bitcoin price movements.

In contrast, the 11 Bitcoin spot ETFs approved in January 2024 hold actual Bitcoin rather than derivatives, allowing investors to participate more directly in cryptocurrency price fluctuations. The main difference between the two lies in their asset base: Bitcoin futures ETFs rely on futures contracts for investment, while Bitcoin spot ETFs more closely track the current BTC price. Then-SEC Chairman Gary Gensler emphasized that investors should remain cautious about the risks associated with Bitcoin and related products. These Bitcoin ETFs allow people to invest indirectly in Bitcoin without actually holding cryptocurrency, operating similarly to gold ETFs, enabling investors to participate in the Bitcoin market without having to hold or protect Bitcoin itself.

Exploring ETP Varieties

In addition to the aforementioned ETFs, this article will introduce three special forms of ETPs: ETNs, ETCs, and ETDs. The following image illustrates the classification of ETPs as drawn by IG International.com:

ETP Types (Source: What Is an ETP and How Can You Trade or Invest? | IG International)

ETN (Exchange-traded Notes)

ETNs (Exchange-traded Notes) are a special type of exchange-traded product that allows investors to trade on the performance of specific indices, commodities, or investment strategies in the form of unsecured debt. The pricing of ETNs is determined by the issuer (usually a bank) based on the market they track, but the issuer does not actually hold these assets. In other words, ETNs are not backed by any collateral, and investors bear the risk of the issuer potentially failing to fulfill its debt obligations. If the issuer cannot repay its debt to investors, investors may lose part or all of their principal.

Like ETFs, ETNs also have expiration dates, but they do not hold any physical assets, so they are not affected by management costs and have no price limits. For example, if a certain bond is sold out, investors can choose to purchase an ETN as an alternative. Although they don’t actually hold the bond, the price of the ETN will fluctuate with the bond index.

The advantages of ETNs include the ability to track complex investment strategies or commodity indices without the costs of managing physical assets or asset management fees. However, their disadvantages are also apparent: due to the lack of collateral backing, investors need to bear the issuer’s credit risk. Additionally, the trading price of ETNs may deviate significantly from their net asset value.

ETC (Exchange-traded Commodities)

ETDs (Exchange-traded Derivative Contracts) are financial derivative contracts traded on exchanges, as opposed to over-the-counter (OTC) transactions conducted privately. Common ETDs include stock options and currency futures. When ETDs use bonds as the underlying asset, they are also called “Baby bonds,” as traditional bonds usually have higher transaction amounts, while ETDs have lower investment thresholds.

As a type of ETP, ETDs can be listed and traded on securities exchanges, allowing investors to operate these products like buying and selling stocks. ETDs enable investors to track specific bond indices or strategies, indirectly participating in the rise and fall of underlying assets, and participate in the bond market at a lower cost. However, investing in ETDs also carries risks, such as interest rate risk and credit risk. Sometimes, their liquidity may be poorer than directly held bonds, and their prices may deviate from their actual value.

ETD (Exchange-traded Derivative Contracts)

ETDs (Exchange-traded Derivative Contracts) are financial derivative contracts traded on exchanges, as opposed to over-the-counter (OTC) transactions conducted privately. Common ETDs include stock options and currency futures. When ETDs use bonds as the underlying asset, they are also called “Baby bonds,” as traditional bonds usually have higher transaction amounts, while ETDs have lower investment thresholds.

As a type of ETP, ETDs can be listed and traded on securities exchanges, allowing investors to operate these products like buying and selling stocks. ETDs enable investors to track specific bond indices or strategies, indirectly participating in the rise and fall of underlying assets, and participate in the bond market at a lower cost. However, investing in ETDs also carries risks, such as interest rate risk and credit risk. Sometimes, their liquidity may be poorer than directly held bonds, and their prices may deviate from their actual value.

Bitcoin-related ETPs and ETFs

Bitcoin ETPs and ETFs serve as gateways for investors to enter the cryptocurrency market. XBT Provider (later acquired by CoinShares) pioneered the first Bitcoin ETP on the Swedish Nasdaq in 2015. While initial market growth was sluggish, the latter half of 2020 saw a significant surge in product offerings as both emerging cryptocurrency firms and established financial institutions joined the fray. In the realm of Bitcoin-related ETFs, Purpose Investment made history by launching the world’s first Bitcoin ETF — Purpose Bitcoin — on the Toronto Stock Exchange in February 2021.

The existence of cryptocurrency ETPs somewhat contradicts the ideology of native cryptocurrency technology, as ETPs introduce intermediaries, while the core concept of cryptocurrencies is decentralization and elimination of intermediaries. However, ETPs, as regulated and easily understood investment tools, provide opportunities for a broader investor base, including novice investors, to access the cryptocurrency market. Many retail investors may lack the infrastructure for direct cryptocurrency investment (such as wallets, centralized exchanges, cryptocurrencies, risk tolerance, or expertise), while institutional investors may be unable to directly hold crypto assets due to regulatory, compliance, technical, or internal policy restrictions. The traditional securitization structure of ETPs effectively opens a channel for these investors to invest in cryptocurrencies.

As the regulatory environment improves and the market gradually matures, the popularity of Bitcoin ETFs and ETPs is on the rise. These products not only lower the entry barrier but also provide more liquidity and transparency to the market. Particularly with the approval of spot Bitcoin ETFs in the United States, they will further consolidate the position of cryptocurrencies in traditional financial markets.

ETPs vs. ETFs: A Comparative Analysis

While both ETPs and ETFs are exchange-traded products that offer investors opportunities to participate in various asset classes, they differ in structure, regulation, and trading characteristics.

ETPs are a broad classification that includes various structures such as Exchange Traded Commodities (ETCs) and Exchange Traded Notes (ETNs), allowing investors to participate in commodities or other assets in a manner similar to trading stocks. ETFs, on the other hand, are investment vehicles specifically designed to track underlying indices, composed of various securities (such as stocks and bonds). ETFs typically offer higher liquidity, lower trading costs, and better risk management, making them more popular among investors.

In terms of structure and regulation, there are key distinctions between ETFs and ETPs. Most ETFs are registered with and regulated by the U.S. Securities and Exchange Commission (SEC), and are overseen by a board of directors and the Financial Industry Regulatory Authority (FINRA), ensuring their stability in terms of liquidity and risk management. In contrast, ETNs, a type of ETP, are not subject to the Investment Company Act of 1940 and lack board oversight, resulting in a relatively looser regulatory framework and potentially higher risks.

ETFs are a category within ETPs and are typically favored for their excellent liquidity, relatively low trading costs, and diverse investment options, particularly evident in passive index-tracking ETFs. On the other hand, ETPs, as a broader investment category, offer various structures to meet different investment needs and risk preferences. The flexibility of these products allows ETPs to cover a wider range of asset classes, but compared to ETFs, their risks and costs may be more variable.

Conclusion

As financial markets evolve, ETFs and ETPs have become vital tools for investors seeking to diversify their portfolios. ETFs, known for their high liquidity, low costs, and transparency—particularly in passive index tracking—have drawn significant market capital. The recent U.S. listings of spot Bitcoin and Ethereum ETFs have further accelerated cryptocurrency ETF development. ETPs, on the other hand, encompass a wider range of products, including ETNs, ETCs, and ETDs. While they offer flexibility for specific asset classes or investment strategies, ETPs also come with higher risks and less stringent regulatory oversight.

Overall, both ETFs and ETPs provide investors with opportunities to participate in a wide range of asset classes. In the future, with the introduction of more cryptocurrency-related products, these exchange-traded products will continue to play a crucial role in global investment markets, creating greater investment value and opportunities for investors. As markets mature and regulatory environments improve, these products not only provide convenient investment channels for traditional and emerging assets but also drive further innovation and development in financial markets.