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.
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
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.
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
Exchange traded managed funds can also be bought and sold on an
exchange in a similar way to buying and selling units of an
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
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
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
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.
Last updated: 09 Sep 2016