As exchange-traded products have proliferated in the marketplace, the once simple product has become much more complex and is perhaps even a trap for unsuspecting investors. These products, which include ETFs, ETNs, ETCs, and the like, therefore, warrant a discussion of a plan of action for helping clients identify the right ETP. Since 1993, when the first U.S. ETF was brought to market, assets and the number of offerings have grown exponentially. There are now more than 1,473 issues with a total value as of September 2012 of $1.3 trillion.

The strategic and tactical benefits of ETPs versus their conventional mutual fund counterparts include: low cost, transparency, tax efficiency, flexibility (short and margin positions), and intraday trading. However, the complexities among ETP offerings have increased, and investors should understand how these issues impact their total-return experience. The structure of an ETP can impact its risk-reward trade-off, costs, and tax-efficiency nature. For example, an ETP tracking the same index but structured as an open-end fund or a unit investment trust (UIT) might have completely different return series and tax-efficiency characteristics than one structured as a limited partnership (LP) or grantor trust (GT). Of the ETP structures shown in Figure 1, the most popular are open-end funds and UITs.

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