Exchange Traded Products

About Exchange Traded Products (“ETPs”)

ETPs are investment products that are listed on a national stock exchange and can be bought and sold in the equity trading markets. ETPs encompass a number of structures which track an underlying benchmark, index, or portfolio of securities. ETPs may be structured as registered unit investment trusts (UITs), exchange-traded funds (ETFs), exchange-traded notes (ETNs), grantor trusts or commodity pools.

The majority of ETPs are structured as UITs or ETFs whose shares represent an interest in a portfolio of securities that either track an underlying benchmark or index. In order to achieve their objectives, ETPs generally either (a) directly invest in assets such as stocks, bonds, currencies, or commodities that underlie the benchmark, or (b) utilize a representative sampling strategy that attempts to achieve a similar performance to the benchmark without investing in all of the underlying securities of the benchmark.

A number of ETPs employ, to varying degrees, more sophisticated, financial strategies and instruments such as leverage, futures, swaps, derivatives and short selling in order to achieve their investment objectives ("Alternative ETPs"). Alternative ETPs are more complex than traditional ETPs and may not be appropriate for all investors. These may include some ETNs, leveraged or inverse ETPs, some actively-managed ETPs, currency ETPs, commodity ETPs, target return ETPs, volatility ETPs, and other products.

Passive or Non-Managed ETPs

Passive or non-managed ETPs generally seek to replicate the performance of an index or benchmark that they track. Leveraged ETPs seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETPs seek to deliver the opposite of the performance of the index or benchmark they track.

Most leveraged and inverse ETPs “reset” daily, meaning that they are designed to achieve their stated objective on a daily basis. If held for longer periods of time, their performance can diverge significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period. This could lead to increased levels of risk, including without limitation, market risk, volatility risk, liquidity risk, and positive and negative compounding risk. This effect can be magnified in volatile markets.

Generally, futures-linked ETPs attempt to track a futures-based commodity, currency, or volatility index. These ETPs may hold futures contracts, swaps, forward contracts, or other derivatives. They are not the equivalent of investing directly in the actual physical commodity, currency, or volatility instrument. As a result of their complex structure, their performance may not necessarily correspond to the price performance of the underlying investment. This deviation could be positive or negative depending on market conditions and investment strategy.

Actively- Managed ETPs

Actively-managed ETPs do not seek to replicate the performance of a specified passive index of securities. Instead, they use an active investment strategy to attempt to meet their investment objective. An investor’s decision to invest in actively managed ETPs would usually be based on their assessment as to whether the ETP investment manager can select securities that will lead to outperformance versus the benchmark, net of the ETPs fees, over a given market cycle or longer period of time. Actively-managed ETPs typically charge higher fees than ETPs that passively track an index.

Volatility ETPs

Some Alternative ETPs may use a volatility component as a part of their overall strategy, while other ETPs may identify exposure to volatility as a primary investment objective. Furthermore, some products may seek inverse, leveraged, or leveraged inverse exposure to the CBOE Volatility Index (VIX). There is no way to invest directly in the VIX, so volatility oriented ETPs must rely on alternate indices that actually reflect the market’s expectation of volatility at some point in the future, rather than providing exposure to the volatility that the markets are experiencing at the present point in time. Volatility ETPs are not based on, nor do they track, the returns of the VIX, and thus the performance of a volatility ETP will not actually mimic the performance of the VIX. The buying and selling of contracts in the futures market, which could result in losses, could adversely affect the value of the Index underlying your ETPs and, accordingly, decrease the value of your investment.

Target Return ETPs

Target Return ETPs are a type of Alternative ETP that employ the use of derivatives contracts to provide predetermined return outcomes based on the price performance of an underlying market, such as US equities, Treasury bonds, or commodities, over specific timeframes, known as “Outcome Periods.” Outcome Periods, which vary by product, are point-to-point periods, over which performance of the underlying market is measured, and the product’s upside participation and downside protection features, if any, are applied to achieve the ETP’s stated return objective. To fully achieve a Target Return ETP’s stated return objective, if at all, shares must be purchased at the beginning of the Outcome Period and held until the conclusion of the Outcome Period. Purchases after the Outcome Period has begun, and/or sales prior to the conclusion of the Outcome Period, may result in return outcomes that are significantly worse than the Target Return ETP’s stated objective. These adverse return outcomes may include, but are not limited to, a complete loss of any downside protection and/or little to no ability to participate in future gains of the underlying market. Even when held for the entirety of the Outcome Period, there is no guarantee that the Target Return ETP will achieve its stated return objective. Target Return ETPs, like other ETPs, are continuously issued and redeemed, trading on national exchanges with the ability to be purchased and sold in the equity trading markets. Target Return ETPs invest directly in flexible exchange options (“FLEX Options”) to meet stated return objectives. These customizable, European-style options contracts may be less liquid than standard listed options and can only be exercised at maturity. As such, the full value of a Target Return ETP’s upside potential, and/or downside protection, if any, cannot be realized prior to the conclusion of the Outcome Period. Illiquidity of the underlying holdings, whether actual or perceived, may adversely impact the value of the Target Return ETP. Due to the complexity of their structure and underlying holdings, the performance of Target Return ETPs will not always correspond directly to the price performance of the intended underlying market. Additionally, FLEX Options do not entitle investors to the dividends of the underlying security or index from which their performance is derived. Investors should carefully read the product's prospectus, which is available through your financial advisor, in order to more fully under stand the product’s unique risks, tax consequences, structure, operations, fees, and expenses.

Exchange-Traded Notes (“ETNs”)

An ETN is a common name for a senior, unsecured debt obligation designed to track the total return of an underlying market index or other benchmark, minus investor fees. The repayment of the principal, interest (if any), and any returns at maturity or upon redemption are dependent on that issuer’s ability to pay. Thus, the issuer’s potential to default is an important consideration for ETN investors. ETNs do not generally offer principal protection unless specifically stated in the prospectus. Some ETNs are callable or redeemable by the issuer before their stated maturity date. Furthermore, the trading price of an ETN in the secondary market may be adversely impacted if the issuer’s credit rating is downgraded.

Commodity ETPs

The majority of commodity ETPs track a commodity, basket of commodities, or commodity index through the use of derivatives such as futures contracts. The performance of commodity-futures linked ETPs can deviate significantly from the performance of the referenced commodity or commodity index, especially over longer periods. Contango is a specific commodity market condition that can contribute to the divergence from a commodity's spot price performance exhibited by certain commodity futures-linked ETPs. This negative roll yield may lead a systematic erosion of the ETP's value over time. Commodity ETPs may be subject to greater volatility than traditional ETPs and can be effected by increased volatility of commodities prices or indexes as well as changes in supply-and-demand relationships, interest rates, monetary and other governmental policies, or factors affecting a particular sector or commodity. ETPs that track a single commodity may exhibit even greater volatility. 

Commodity ETPs that use derivatives may involve still greater risk. The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Commodity-linked investments can be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Please consults you tax advisor regarding commodity ETPs, as the products could be taxed differently depending upon their structure, which is viewable in the product's prospectus. 

Currency ETPs

Currency ETPs may track a particular currency or a basket of different currencies relative to the U.S. dollar, or even against other currencies. Substantial purchases or sales of a foreign currency by the official sector of the relevant foreign country could adversely affect an investment in the ETP. The official sector generally consist of central banks, other governmental agencies, and multi-lateral institutions that buy, sell, and hold foreign currencies as part of their reserve assets. The official sector holds a significant amount of foreign currencies that can be mobilized in the open market. In the event that future economic, political or social conditions or pressures require members of the official sector to by or sell their currency simultaneously or in an uncoordinated manner, the demand for the foreign currency might not be sufficient to accommodate the sudden change in the supply of the foreign currency to the market. Consequently, the price of the foreign currency could decline, which would affect an investment in the relevant ETP.  

Other Important Information Regarding ETPs

- Alternative ETPs will generally have higher fees than traditional ETPs.  All fees and expenses are described in the prospectus.

The ability of ETP issuers to perpetually create new shares contributes to ETPs efficiently and accurately tracking their respective indices. However, under certain circumstances, issuers may cease or suspend creating new shares, which may cause ETPs to trade at a price that differs significantly from the value of its underlying holdings or index. Furthermore, all ETPs may trade at a premium or discount to its Net Asset Value (NAV) or indicative value in the case of ETNs.

Some ETPs may have low trading volumes, which could adversely impact your ability to buy or sell shares at the desired price and quantity.

ETPs can be closed for a variety of reasons, which can cause forced taxable events for investors, including capital gains distributions. Furthermore, there can be closing costs associated with the final liquidation of the ETP as well as index tracking uncertainty as the ETP liquidates its assets.

Investors should consider the investment objectives, risks, and charges and expenses of exchange-traded products carefully before investing. The prospectus contains this and other information about these investments. The prospectus is available from your financial advisor and should be read carefully before investing.

Other resources:

NYSE Exchange Traded Funds

NYSE Exchange Traded Notes

SEC Investor Bulletin: Exchange-Traded Funds

SEC Fast Answers: Exchange-Traded Funds

FINRA Exchange- Traded Funds and Products

FINRA The Lowdown on Leveraged and Inverse Exchange-Traded Products 

FINRA Non-Traditional ETFs FAQ