Examine the managed product (exchange traded funds, contracts for difference, real estate investment trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.

Stock exchanges may list a range of managed and derivative products. These standardised products are known as exchange traded contracts.

Exchange traded funds (ETFs) usually invest in a basket of securities listed on the local or international exchanges, foreign currencies or commodities. ETFs provide access to a diversified portfolio of securities. ETFs are a type of exchange traded product (ETP). ETPs include active ETFs, where a manager deploys strategies to outperform a benchmark, and structured products (SPs), which promise to pay a rate of return based on the movement in the price of an underlying asset.

A contract for difference (CFD) is an agreement to exchange the net difference in value between the start date and the close date of a CFD. The CFD is based on a specified security. Only a deposit is paid initially, therefore the CFD is highly leveraged (increased risk).

A real estate investment trust (REIT) issues units in the trust in order to raise funds to purchase property, including industrial, hotels and leisure, retail and office. Assets generate rental income and (hopefully) capital gains.

Infrastructure funds enable investors to gain access to large-scale infrastructure projects, such as utilities, transport, materials handling and communications facilities.

An option contract gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) a specified security at a predetermined price and date. The writer of the option receives a premium payment from the option buyer.

An equity warrant gives the holder the right to buy (or sell) the underlying security at a specified price on or before a nominated date. Stock exchanges list a wide range of warrant contracts.

A futures contract is an agreement between two parties to buy (or sell) a specified commodity or financial instrument at a specified date in the future. The value of the futures contract moves as the price of the underlying asset in the physical market moves. Settlement may be for delivery of the asset or cash

Question:

1. Explain the difference between an ETF and an active ETF.
2. With a CFD it is possible to lose many times the initial investment amount. Explain why this circumstance can arise.