Passive investments with ETCs, ETNs and Co.

In addition to the highly sought-after ETFs other asset classes with three letters have been added in recent years.They have some similar characteristics but also some subtle differences. A classification.

ETFs, short for Exchange Traded Funds, literally means exchange traded funds. The name is somewhat misleading, as ETFs are passive funds on all European markets and in the USA, which track an index and must also meet two criteria:

• The providers of ETFs publish the composition of the portfolio daily. This gives investors a continuous overview of the individual shares in the fund.
• ETFs have a so-called creation/redemption mechanism, which allows professional market participants to exchange baskets of shares corresponding to the index composition for ETFs (and vice versa) with the fund company at any time. For these shares, they constantly set prices at which investors can buy or sell.

Another very important feature of ETFs from an investor's perspective is their legal status. They are funds under EU law. The assets under management are held as special assets by a custodian bank, so issuers are protected against problems such as possible insolvency. This status can also be recognised by the "UCITs" component of the name. UCITS stands for Undertakings for Collective Investments in Transferable Securities, the international designation for mutual funds regulated by BAFIN.

In April 2020, around 1,500 ETFs are listed on Xetra, Europe's largest marketplace for this form of investment.

ETCs and ETNs have since been added as two further asset classes, which are very similar to ETFs, although the terms are used differently in the capital market. The securities traded on Xetra and on the floor of Frankfurt Stock Exchange can be distinguished in this way:

• ETC stands for Exchange Traded Commodity ¬- a term that has become established in the market for securities and reflects the price development of commodities.

Legally, ETCs are not special funds, but rather bonds like a certificate. This characteristic is based, among other things, on fund law, which stipulates a minimum number of different forms of investment for mutual funds. An ETF that only invests in silver, as is possible in Switzerland, is not permitted under EU law.

From an investor's point of view, this construct is disadvantageous because it involves an issuer risk. If the issuer defaults, the capital invested is counted as part of the insolvency assets.

Therefore most ETCs are collateralised: By physical deposit of commodities or fiduciary deposit of collateral. Investors can find out the type of collateralisation in the data sheet of an ETC on the website www.boerse-frankfurt.com

Xetra Gold, the most traded commodity product, is also legally a certificate. However, the provider deposits physical gold for the shares purchased, does not conduct any other business and consists of a consortium of banks. For more information, visit www.xetra-gold.com.

There are currently about 150 ETCs listed at Frankfurt Stock Exchange.

• ETN stands for Exchange Traded Note. They are legally the same as ETCs, i.e. securitisations. The purpose of ETNs: They depict market indicators and trading objects that would otherwise not be available to many investors - especially volatilities, currency pairs. Or multiple leveraged index trackers, because fund law only allows a maximum leverage of two. ETNs can be secured as well as unsecured. About 30 ETNs are currently offered.

A fourth term, ETP - Exchange Traded Product - combines ETCs and ETNs.

Traded like ETFs, but not an investment fund

In summary, trading with ETNs and ETCs like ETF trading on Xetra and the Frankfurt floor is transparent, fast, inexpensive and with permanent buying and selling opportunities. But: Since the funds invested in ETCs and ETNs are not part of the issuers' special assets, unsecured products are associated with the risk of debtor default. In return, the construction of ETCs and ETNs makes it possible to participate in the performance of commodities, more exotic securities and other market indicators. An exposure to stock market volatility, for example, has not been possible via ETFs to date.

Special form: Active ETFs

A more recent form of ETFs are Active ETFs. Currently there are 43 Active ETFs offered at Frankfurt Stock Exchange. They are legally mutual funds and are traded like ETFs. However, the management intervenes in the composition, such as the sector distribution or weighting. Active ETFs do not simply passively track an index. This usually makes them expensive ¬ Costs that management has to generate with an excess return. Nevertheless, the costs are often lower than those of classic mutual funds and many of the active ETFs have a purely quantitative, fixed approach.