Introduction to ETPs

Exchange Traded Products (ETPs) is a broad term encompassing a type of security that tracks an underlying asset like stocks, bonds, or cryptocurrencies, and is traded on the open stock exchange. ETPs provide investors with exposure to various assets and offer liquidity and pricing transparency. The historical beginnings of ETPs are one of innovation and adaptation to meet investor demands, first emerging in the early 1990s, with the first successful Exchange Traded Fund (ETF) of the Standard & Poor’s Depositary Receipt (SPDR) launching in 1993, tracking the S&P500 Index, trading like a stock.

As time progressed, the portfolio of ETPs available to investors expanded in number and across various sectors, including bonds and commodities.  Exchange Traded Notes (ETNs) on the other hand, were introduced later in the early 2000s, where investors were offered a variety of assets and strategies that were structurally more difficult to replicate as ETFs. Since then, ETPs have rapidly expanded globally and range in functionality including leverage and inverse ETPs, thematic products, and even actively managed ETFs.

Understanding ETPs

Under the term ETP, lie two distinct instruments, primarily ETNs and ETFs. The key differentiator between both instruments are that ETFs are considered equity instruments, where the holder owns the underlying assets and is apportioned ownership of the underlying assets into shares. Whereas ETNs are unsecured debt instruments, they do not represent ownership in a pool of assets but are rather a promise by the issuer of the ETN to pay the return of the specific index. With respect to equities and cryptocurrencies, the execution of such products are identical for both asset classes.

So what separates the spot ETF from a futures ETF? How can we have one and not the other?

A futures ETF does not hold the underlying asset itself but instead holds futures contracts on the underlying asset, functioning as a series of agreements to buy or sell the asset at a predetermined future date and price. This provides investors with exposure to price movement, holding contracts on the asset but not the underlying asset itself. On the contrary, the spot ETF gives investors a claim on the underlying asset based on the real-time price of the asset in the spot market. Ensuring investors’ claim over the underlying asset is enforceable, at the fair marketplace with an allocated supply of 1 to 1 against contracts issued, defines the key difference between spot and futures ETFs.

Crypto ETPs and spot ETFs

Crypto ETPs in the form of notes, backed or unbacked, have been circulating on financial exchanges since 2017. Such ETPs have seen inflows by private investors, hedge funds and family offices, while charging a premium compared to ETPs of other underlying assets. Cryptocurrency custody, pricing and liquidity being the main drivers pushing up cost for investors.

The Bitcoin and Ether spot ETF listings in the United States by players such as BlackRock, ARK and others were a much-anticipated event for several good reasons. The Nasdaq ETF listing offers a wide audience of investors from private individuals and institutions the opportunity to gain exposure to Bitcoin, without having to be concerned about the storage of their assets. In addition to the fundamental factors justifying an immense amount of buying pressure, the spot ETF strongly suggests that digital assets are a maturing market to be taken seriously instilling confidence about the future of the industry. This statement, however, does not blanket the industry with all its protocols, since not all digital assets are mature enough to warrant an ETF. After the first approvals of spot ETFs, one can anticipate more spot ETF filings to follow for other leading cryptocurrencies in years to come.

Spot ETFs have the potential of boosting the demand side of the equation for Bitcoin and Ether while supply remain slow and gradual in the case Bitcoin and deflationary in the case of Ether.

One unanswered questions remains: while the ETF boosts accessibility for institutions, is the appetite by institutions for the ETF actually as high as anticipated?