Another acronym has been added to the alphabet soup of terms in the wealth industry in recent years – ETFs, or exchange traded funds. But just as this term gained popular currency, it might be necessary to replace “ETF” with another acronym as the sector rapidly expands in sometimes confusing ways.

Barclays Global Investors – the world’s biggest provider of ETFs via its iShares brand - reckons that a more appropriate term for that industry should be exchange traded products (ETPs), since not all exchange-listed vehicles are funds, and carry different structures and can come with varying tax treatments and importantly with varying  risks. Eleanor Hope-Bell, head of wealth management sales at iShares, explained to WealthBriefing some of the issues in the market.

BGI is, understandably, an evangelist about the sector in which it is such a large player. It recently launched an education programme about the market under the tagline “Not all ETFs are created equal” in a move to promote use of these instruments, show how they work and how they differ.

The profusion of terms can certainly cause confusion. As well as exchange traded funds, there are exchange traded notes (ETNs) and exchange traded commodities (ETCs). ETNs are debt instruments and are not funds, but they do share several characteristics with ETFs, as both structures are linked to the return of a benchmark index and trade on exchanges. The value of ETNs will also be affected by the counterparty’s debt credit rating. Exchange traded commodities are ETNs and specifically track indices of commodities or single commodities such as gold.

Not all products starting with the words “exchange traded” are the same, either in how they are composed or what sort of risks investors may run. With ETFs, a market that has been running since the early 1990s, they take two main forms: physical ETFs and swap-based ETFs.

A physical ETF, sometimes also called a cash-based ETF or an in-specie ETF, holds a basket of assets, such as equities, that are in the index.

Its aim is to accurately represent and track that index, such as the S&P 500 or the FTSE 100. Such funds are open-ended, or in other words, ETF providers can issue new tranches of shares as well as redeem existing shares in issue in response to demand. As a result there is no problem with ETFs trading at a discount to the net asset value of their assets, as often happens in closed-ended funds such as investment trusts.

Not all physical ETFs hold every single component of an index, particularly where indices are made up of thousands of companies, as is the case with some of the Morgan Stanley Capital International benchmarks (MSCI), for example. Instead, an “optimised ETF”, unlike a “fully-replicated ETF”, will hold a representative number of underlying index components, which is regularly adjusted, to deliver the returns from an index as faithfully as possible.

With swap-based ETFs, meanwhile, the fund does not hold securities that are in an underlying index. Rather, the fund provider will receive from a counterparty, usually an investment bank, the performance of an index such as the FTSE 100 in return for giving the counterparty or counterparties the return on its basket of securities which can, and often is, unrelated to the underlying securities in the index.

With all ETFs, there is some difference between the returns on an index and the ETF that is linked to it, due to transaction costs, for example. ETFs can also be only as liquid as the underlying market they are based on, although ETFs have also boosted market liquidity as a whole by drawing in new sources of investment.

The statistics on the scale of the sector are impressive: the ETF market has grown at a hectic pace since these products were first rolled out in the US in 1993. According to Deborah Fuhr, who recently joined BGI as global head of research and implementation strategy into this sector from Morgan Stanley, there are now a total of 1,499 exchange traded funds – as of the end of the third quarter of this year - with 2,494 listings worldwide and assets of $764.08 billion.

BGI works with intermediaries such as private banks and brokerages rather distribute directly to individual investors. The recent market turmoil has intensified focus on the ETF sector and on exchange traded products of all kinds. Within ETFs, the financial crisis has driven demand for particular ETF sectors, such as fixed income. “Our cash and fixed income range has seen an enormous amount of interest as investors exhibit flight to quality with recent market conditions,” Ms Hope-Bell said.

Not all products that carry the prefix “exchange traded” are the same, and as the market is buffeted by the cold blast of the market turmoil, keeping on top of the detail will prove particularly important for investors and financial professionals alike.