Other exchange traded products
Structured products, active ETFs and
exchange traded hedge funds
Structured products, actively managed exchange traded funds
(active ETFs) and exchange traded hedge funds are traded on the ASX
AQUA market. They may look similar to basic ETFs but they have very
different features and risks. Here we explain why they are much
more complex than basic ETFs.
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, security or other asset.
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.
If the structured product is not fully secured by collateral and it uses derivatives to manage risk, it may be
labelled 'synthetic'. Structured products traded on the AQUA market that use
derivatives, have to include the label 'synthetic structured
product' in their title so you can easily identify them.
Security and collateral
ETFs, structured products may not be backed by 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
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 exposed to
the product issuer's ability to repay you. This is called
counterparty risk. Before investing in a structured product
consider who the counterparty is, and whether you think they
will be able to honour their commitments to investors.
For example, if the counterparty gets into financial
difficulty, you could lose some or all or your investment.
Counterparty risk may be lower 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 reduces
the risks for investors.
Different requirements to 'physical ETFs'
Structured products are not subject to the same disclosure, Yes
governance requirements and investor protections as ETFs.
Unlike traditional ETFs which are passively
managed index tracking funds, active ETFs (also known as
exchange traded managed funds or exchange traded hedge funds) can
be bought and sold on an exchange in a similar way to buying and
selling units of an ETF.
Active vs passive ETFs
Active ETFs are different to passive ETFs in that they are
actively managed to try and outperform an index or achieve some
other investment objective, rather than simply track or mimic the
index. Fund managers must make a distinction between an ETF
and active ETF so that investors know what sort of fund they are
Active ETFs traded on the AQUA market have to include the label
'managed fund' in their title, so you can easily identify them.
They must also include the word 'synthetic' in their title if they
rely on the use of derivatives, instead of holding physical assets
to generate performance.
Disclosure and liquidity
Some active ETFs may have different disclosure and liquidity
requirements, for example, the fund may delay disclosing details of
the portfolio, to protect the intellectual property of the
Where the portfolio holdings are not published daily there will
be different market making arrangements that may result in
increased trading costs and lower liquidity. Investors should
carefully read the PDS to understand the differences and additional
Exchange traded hedge funds
There may be active ETFs that are also hedge funds. These
products are both actively managed and have features that meet the
definition of hedge fund.
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. They must
also 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
Understand these products before you invest
Make sure you understand the nature of the product and risks
involved before you invest in structured products, active
ETFs or exchange traded hedge funds. If you don't
understand how the investment is managed or how the fund manager
aims to achieve the promised returns, talk to a licensed financial
adviser or don't invest in the product.
Before you invest in a structured product make sure you
understand the PDS or prospectus and consider getting professional
Last updated: 24 Apr 2018