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As a trader, you must have spotted securities that trade on exchanges like a stock, but are actually not one. They are trading instruments that track different assets like gold, a market index, or a basket of bonds. Such instruments are called Exchange-Traded Products (ETPs).
ETPs allow you to invest in assets that can’t always be bought directly with the ease of stock trading. Among the different types of ETPs, exchange-traded funds (ETFs) are the most popular among traders in India. But there are other instruments, too, like exchange-traded notes and exchange-traded commodities.
This article will dive deep into the meaning of ETPs, how such instruments work, their main types, benefits, and risks.
Key Takeaways
- ETPs are exchange-listed instruments that trade like shares throughout market hours. They include exchange-traded funds (ETFs), exchange-traded notes (ETNs), and exchange-traded commodities (ETCs).
- Prices of ETPs track an underlying asset. The creation and redemption mechanism run by an authorised participant (AP) keeps its market price close to the fair value.
- During market hours, this fair value is published continuously on the exchange as the Indicative Net Asset Value (iNAV), so investors are not left guessing between one day's closing NAV and the next.
- India’s ETP space is majorly dominated by ETFs. Standalone ETNs are virtually absent in the country, and commodity exposure mostly comes through gold and silver ETFs.
- Costs for investing in ETPs typically run lower than the cost of investing in actively managed mutual funds.
- Taxation of an ETP depends on what's the underlying asset of that particular instrument. Equity, debt, and gold/silver ETPs each follow separate capital gains rules under the Indian taxation system.
What is an Exchange-Traded Product?
An Exchange-Traded Product, or an ETP, is a security that lists and trades on a recognised stock exchange such as the National Stock Exchange of India (NSE) or BSE, in exactly the same way an ordinary share does. It comes under the regulation of the Securities and Exchange Board of India (SEBI).
Unlike a stock, instead of representing ownership in a single company, an ETP is built to mirror the price movement of an underlying asset. It can be a stock index, a commodity like gold or silver, a currency, a bond basket, or a defined market strategy.
The feature that makes the ETP different from the asset it tracks is its structure. You can't buy the Nifty 50 index directly, but you can buy a Nifty 50 ETF, which is an ETP. This is a smart way to take exposure in a benchmark index through a single, tradable unit.
Individual securities such as a single stock or a single bond are never classified as ETPs. These instruments can only be pooled and exchange-listed wrappers built around an underlying benchmark or basket.
How do Exchange-Traded Products Work?
ETPs run on a mechanism called creation and redemption. This mechanism is carried out by specialised entities known as authorised participants (APs).
How creation and redemption works
When investor demand pushes an ETP’s market price above the value of its underlying holdings, APs step in and assemble the underlying basket, hand it to the issuer, and receive new ETP units in exchange.
This increases supply and pulls the price back down. Similarly, when the reverse happens and ETPs trade at a discount, APs redeem units for the underlying assets. This shrinks supply and pushes the price back up.
This continuous arbitrage keeps an ETP’s market price closely aligned with its net asset value (NAV).
ETP prices vs mutual fund NAV
Unlike a mutual fund that is priced once a day, an ETP's price moves continuously through the trading session based on live buying and selling on the exchange.
This is exactly where the iNAV, or Indicative Net Asset Value, comes in. A mutual fund's NAV is struck only once, after the market closes, but an ETP trades all day.
To give investors a live reference point in between, exchanges publish the iNAV, an intraday estimate of the fund's fair value calculated from the real-time prices of its underlying basket, updated roughly every 15 seconds during trading hours.
Comparing the screen price of an ETP against its iNAV at any moment tells you whether it is trading at a premium or a discount to its underlying assets.
How retail investors trade ETPs
Retail investors buy and sell ETP units the same way they trade shares — on the secondary market, through their broker on the NSE or BSE, at whatever the prevailing screen price is.
How Authorised Participants are different
APs work differently from regular investors. They don't normally use the exchange order book to create or redeem ETP units. Instead, they deal directly with the AMC or issuer in the primary market.
They also work in large minimum lots known as Creation Units. These are large blocks of ETP units, often worth several lakhs of rupees or more, because they are exchanged against a full basket of the underlying securities.
This two-level structure is what makes the arbitrage mechanism work. APs deal in large quantities with the AMC in the primary market, while retail investors can trade smaller quantities on the exchange. This ultimately helps keep the ETP’s market price closer to its fair value.
Types of Exchange-Traded Products
ETPs are generally grouped into three broad categories:
- Exchange-Traded Funds (ETFs): ETFs are the most widely used ETPs in India. They pool investor money and hold the actual underlying securities in a portfolio.
- Exchange-Traded Notes (ETNs): ETNs are structured differently. Rather than holding the underlying assets, an ETN is an unsecured debt obligation issued by a bank or financial institution. It promises to pay the return of a tracked index at maturity, minus fees.
- Exchange-Traded Commodities (ETCs): ETCs give investors exposure to a single commodity or a commodity basket without the hassle of physical storage or delivery.
In India, this segment is represented mainly by gold ETFs and silver ETFs, which are typically backed by physical bullion held by a custodian on behalf of the fund.
Quick comparison:
| Feature | ETF | ETN | ETC |
| Legal structure | Pooled fund holding real assets | Unsecured debt note | Fund backed by physical commodity |
| Ownership of underlying | Yes, indirect ownership | No, it’s a promise to pay | Yes, usually via bullion custody |
| Key risk | Market and tracking-error risk | Market risk plus issuer credit risk | Market and storage/custody risk |
| Availability in India | Widely available | Not common for retail investors | Available via gold/silver ETFs |
ETPs vs Mutual Funds: The Real Difference
ETPs and mutual funds both pool money into a diversified basket. But the similarity ends here itself. The table below highlights how they differ in practice.
| Parameter | ETPs | Traditional Mutual Funds |
| Trading | Bought and sold on the exchange all day like shares | Bought and sold once a day at end-of-day NAV |
| Pricing | Real-time, market-driven price | Single NAV calculated after market close |
| Account needed | Demat and trading account | Folio with a fund house; demat account optional |
| Expense ratio | Generally lower, especially for passive ETFs | Often higher, particularly for active funds |
| Order types | Supports limit, stop-loss and market orders | Simple buy/sell/switch requests only |
| Minimum investment | Cost of one unit plus brokerage | Can start from smaller amounts in SIP (systematic investment plan) mode |
Benefits of Investing in ETPs
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Diversification in one trade: A single ETP unit can spread your money across dozens or hundreds of underlying securities.
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Lower ongoing costs: Passively managed ETPs typically charge a smaller expense ratio than actively managed funds.
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Trading flexibility: Units can be bought or sold anytime during market hours, using limit or stop-loss orders.
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Transparency: Most ETPs disclose their underlying holdings daily, so you always know what you own.
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Access to hard-to-reach assets: Gold, global indices or bond baskets become available without direct ownership hassles.
Risks and Limitations of ETPs
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Market risk: An ETP’s value moves with its underlying asset, so losses can be as much as gains.
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Tracking error: Fund expenses, cash drag and rebalancing timing can cause an ETP’s return to drift from its benchmark.
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Liquidity risk: Some ETPs don't trade very actively, which can mean wider bid-ask spreads and higher costs when buying or selling.
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Issuer risk (for ETNs): Since an ETN is a debt promise, the issuer's financial health matters as much as the index it tracks.
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Brokerage and demat costs: Every trade attracts brokerage, securities transaction tax (STT) and other charges that a buy-and-hold mutual fund investor may avoid.
Note: Do not look at trading volume alone to judge liquidity. An ETP may have low trading volume on the exchange but still be fairly easy to buy or sell in larger amounts because its liquidity also comes from the underlying securities. One useful measure here is impact cost. It basically shows how much the actual execution price differs from the ideal market price for a particular order size. A lower impact cost usually means better liquidity, while a higher one means a large order could move the price against you.
Taxation of ETPs in India
Tax treatment depends entirely on what the ETP holds as the underlying asset. Here’s how the major categories are typically taxed for individual investors, based on current income tax rules.
| ETP Category | Holding Period For LTCG | LTCG Rate | STCG Rate |
| Equity ETFs | More than 12 months | 12.5% above ₹1.25 lakh/year | 20% |
| Debt ETFs | No separate LTCG benefit | Taxed at slab rate | Taxed at slab rate |
| Gold/Silver ETFs | More than 12 months | 12.5% | Taxed at slab rate |
STT applies on the sale of equity ETPs, and any dividend or interest distribution is added to your taxable income and taxed at the applicable slab rate. Because rules are revised periodically through the Union Budget, it’s worth confirming current rates before filing returns or planning an exit.
How to Invest in ETPs in India?
If you already trade in shares, getting started with ETPs is a straightforward process:
– Open a demat and trading account with a SEBI-registered broker.
– Complete your KYC formalities and link your bank account for settlements.
– Shortlist an ETP based on your goal. It can be to track an index, taking exposure in gold or debt allocation.
– Compare expense ratio, tracking error and average trading volumes across similar options.
– Place a buy order through your trading platform during market hours, using a limit order for price control.
– Track your holding's NAV, liquidity and corporate actions periodically, and sell on the exchange whenever you wish to exit.
Conclusion
Exchange-Traded Products have changed the way an ordinary investor can access markets, commodities and strategies that once required specialised accounts or large capital.
By combining the structure of a fund with the tradability of a stock, ETPs let you build a diversified, low-cost portfolio without leaving your regular trading account.
That said, not all ETPs are alike. Structure, liquidity and tax treatment vary meaningfully across ETFs, ETNs and ETCs. Understanding these differences before you invest helps you match the right product to your goals, time horizon and risk appetite.
