The English name of ETF is ExchangeTradedFund, which translates into transactional open index fund. It can buy or redeem fund shares from fund management companies, and at the same time, it can buy and sell ETF shares at market prices in the securities market like stocks. In short, it has the advantages and characteristics of stocks, open index funds and closed index funds.

How does ETF arbitrage?

It is precisely because ETF can be purchased and redeemed, and can also be traded in the secondary market, so when there is a price difference between the market price and the net value of the fund unit, we can carry out arbitrage trading.

In detail, we all know that in the secondary market, the price of ETF changes in real time, but off-site, the subscription and redemption of funds are calculated according to the unit net value, which is calculated according to the closing price, so it will only change once a day.

In this way, there will be a price difference between on-site and off-site. When the transaction price of the fund in the secondary market is lower than the actual net value, this situation is called "discount". Investors can buy funds in the secondary market and then apply for redemption outside the market to earn risk-free spreads.

On the contrary, it is a premium, which means that the market price of the fund is higher than the net value. Investors can buy the fund outside the market and then sell it in the market to earn a risk-free price difference.

The change of fund price is usually small, so when the spread is very small, this arbitrage behavior may not be cost-effective because of trading commission or handling fee.