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ETF, ETP differentiation significant

There is an important difference between exchange-traded funds (ETF) and exchange-traded products (ETP) and it is an important fact SMSF investors should be aware of, according to an economist working in the space.

An ETF is an investment product that tracks a specific market index, BetaShares chief economist David Bassanese said while presenting at the recent SMSF Trustee Empowerment Day 2016.

“They’re all managed funds, they’re all listed on the share market so they all trade on the share market, but an exchange-traded product is a broader concept,” Bassanese added.

“It doesn’t just passively track an index. Exchange-traded managed funds are non-discretionary rules-based funds.

“So they don’t track an index, but they may follow a rule.”

He used one of his organisation’s offerings to illustrate how an ETP works.

“We have a fund that employs a covered call investment strategy,” he said.

“So how that works is we own shares, we sell call options against the shares to pick up income, allowing us to receive additional income from that investment.

“Basically that’s a rule so every month we roll the calls and we keep buying calls and picking up that call option income. That’s a non-discretionary rule that is followed and the product is treated as an exchange-traded managed fund.”

He pointed out an additional range of ETPs are now becoming available.

“What’s coming to the market now are more active managers who are putting their funds within an ETF-type structure and they are also regarded as exchange-traded active funds.

“So you might see ETP mentioned, you might see ETF mentioned sometimes when you hear talk about this type of fund and that’s basically the difference.

“An ETF is one that’s purely passive tracking an index, while ETPs employ more rules-based strategies.”

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