Other exchange traded products

Structured products, exchange traded managed funds and exchange traded hedge funds

Don't confuse exchange traded funds (ETFs) with other investments that may look similar but have different features and risks. These other products are traded on the ASX AQUA market and include structured products, exchange traded managed funds and exchange traded hedge funds.

Before you invest in these products you should understand their risks and complexities.

Structured products

A structured product is a promise by a company to pay you a return that is usually based on the movement in the value of reference assets such as a share index, securities or other assets.

Some issuers also call their structured products names such as 'exchange traded notes', 'exchange traded commodities', 'exchange traded international securities' or 'trackers'. While some of these names sound similar to 'exchange traded funds', these structured products are quite different.

Unless the structured product issuer's promise is fully secured by collateral, it may also be labelled 'synthetic' if the issuer is likely to use derivatives to manage its risks.

Structured products traded on the AQUA market have to include the label 'synthetic structured product' in their title, so you can easily identify them.

Security and collateral

Like synthetic ETFs (and unlike physical ETFs), structured products may not be backed by a specific pool of physical assets such as cash, bonds and shares. Therefore investors must rely on the creditworthiness of the product issuer or a guarantor such as the issuer's parent company.

Some structured product issuers are 'special purpose vehicles' (sometimes called 'SPVs') with little or no financial substance. These issuers tend to hedge or offset their risk by entering into contracts with third parties. In these cases investors rely on the creditworthiness of the third parties to pay out their investment returns.

You should check the product disclosure statement (PDS) to see if the product issuer provides some security for investors.

Structured products will be labelled 'collateralised' when the product issuer's promise to repay investors is adequately secured and the ETF (or issuer as trustee) retains beneficial title to the security collateral at all times. This means that if the issuer's counterparty in an over-the-counter swap arrangement becomes insolvent, investors will have immediate control of the collateral assets.

Counterparty risk

When you buy a structured product you could be fully exposed to the product issuer's ability to repay you. This is called counterparty risk. Before investing in a structured product you should consider who the counterparty is, because if the counterparty is unable to honour its commitments to investors (for example, if it gets into financial difficulties), you could lose a substantial amount of money.

The risk is much higher than the counterparty risk with synthetic ETFs traded on the AQUA market, as Australian Securities Exchange (ASX) requirements restrict the aggregate money owing under derivatives contracts (counterparty exposure). This also reduces the risks for investors.

Different requirements to 'physical ETFs'

Structured products are not subject to the same disclosure, governance requirements and investor protections as ETFs.

Exchange traded managed funds

Exchange traded managed funds can also be bought and sold on an exchange in a similar way to buying and selling units of an ETF.

However, exchange traded managed funds are different to ETFs as they may be actively managed to try and outperform rather than track or mimic an index, or to achieve some other investment objective. 

Managed funds traded on the AQUA market have to include the label 'managed fund' in their title, so you can easily identify them. They also include the word 'synthetic' in their title if they rely on the use of derivatives, rather than holding physical assets to generate performance. 

Exchange traded hedge funds

Exchange traded hedge funds are a sub-category of exchange traded managed funds.

Like other hedge funds that are offered 'off exchange', hedge funds traded on the AQUA market use instruments and techniques such as leverage, derivatives and short selling

To date, hedge funds traded on the AQUA market have to include the words 'hedge fund' in their title, so you can easily identify them.

Hedge funds are not labelled 'synthetic' even if they rely on the use of derivatives. The use of these alternative strategies means that hedge fund investors can be exposed to more diverse and complex risks than those associated with 'vanilla' managed funds.


Before you invest in these exchange traded products, we recommend you take extra care to understand their nature and risks. If you don't understand how the investment is managed and how promised returns are achieved, you should get advice from a licensed financial adviser or not invest in the product. 

As well as reviewing recent announcements made on the ASX relating to the product, make sure you read and understand the PDS or prospectus and consider getting professional financial advice before investing in any of these exchange traded products.

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Last updated: 09 Sep 2016