Cash substitution is divided into three types: cash substitution is prohibited (marked as "prohibited"), cash substitution is possible (marked as "allowed") and cash substitution is required (marked as "required").

The prohibition of cash substitution means that when subscribing and redeeming fund shares, the constituent stocks are not allowed to use cash as a substitute.

Theoretically, the prohibition of cash substitution should be the origin of ETF subscription and redemption rules, that is, the principle of direct exchange between a basket of stocks and ETF shares.

It can effectively control the transaction costs and tracking errors of ETFs and ensure the effectiveness of the basic arbitrage mechanism of ETFs.

However, in actual operation, due to the existence of special circumstances such as suspension of trading of constituent stocks, if cash substitution is strictly prohibited, investors will be unable to purchase suspended stocks and be unable to subscribe normally.

Therefore, ETF funds will set up stocks that can be replaced by cash.

Cash substitution means that when subscribing for fund shares, cash is allowed to be used as a substitute for all or part of the component stocks, but when redeeming fund shares, cash is not allowed to be used as a substitute for the component stocks.

For stocks that are replaced by cash, fund managers need to buy them after they resume trading. For this reason, the fund company will charge a certain cash premium to the subscribers.

Necessary cash substitution means that when subscribing and redeeming fund shares, the component securities must be replaced with cash.

This setting is generally applicable to component stocks that will be removed from the underlying index adjustment or that the fund company deems it necessary to implement cash replacement for reasons such as protecting the interests of shareholders.

For stocks that must be replaced by cash, the fund manager will announce a certain amount of cash to be replaced in the subscription and redemption list, that is, the "fixed replacement amount."

ETF is an exchange-traded open-end index fund, an open-end fund with variable fund shares that is listed and traded on an exchange.

ETFs, like the familiar closed-end funds, can be traded on exchanges in the form of small "units."

Similar to open-end funds, ETFs allow investors to subscribe and redeem continuously. However, when redeeming ETFs, investors receive not cash but a basket of stocks. Subscriptions and redemptions are only allowed after reaching a certain scale.

Back.

Compared with closed-end funds, the same point is that ETFs are listed and traded on exchanges, just like stocks, and can be traded at any time during the day. The differences are: ①? ETFs are more transparent.

Since investors can subscribe/redempt continuously, fund managers are required to publish their net worth and investment portfolio more frequently.

②? ② Due to the continuous subscription/redemption mechanism, theoretically there will not be a large discount/premium between the net value and market price of ETFs.

?Extended information: Calculation of various amounts of cash replacement: Cash replacement guarantee rate: refers to the ratio between the amount of cash replacement margin and the market value of the securities being replaced.

The calculation method of the market value of the securities being replaced shall be prescribed and announced by the fund manager.

Cash substitution margin: refers to the cash that investors should pay when substituting cash during the process of subscribing for fund shares to ensure that they make up for the substituted securities in accordance with the provisions of the fund manager.

Cash replacement ratio upper limit: There is a strict upper limit on investors’ ETF cash replacement ratio.

The fund manager will set a daily upper limit on the cash replacement ratio based on the estimated number of constituent stocks that may experience a daily limit or temporary trading suspension.

If the actual cash replacement ratio when an investor subscribes is greater than the cash replacement ratio upper limit (MCR) set in the subscription and redemption list on the day, the subscription will fail.

Estimated cash portion: refers to the estimated cash difference for the day calculated by the fund manager and published in the T3 subscription and redemption list.

Estimated cash portion on day T = Fund net asset value of the minimum subscription and redemption units on day T-1 (the fixed replacement amount that must be replaced by cash in the subscription and redemption lists + the component securities that can be replaced by cash in the subscription and redemption lists)

The sum of the number multiplied by the expected opening price on day T + the sum of the number of component securities in the subscription and redemption list that are prohibited from being replaced by cash multiplied by the expected opening price on day T).

Cash difference: Cash difference on T day = Fund net asset value of the minimum subscription and redemption units on T day (the fixed replacement amount that must be replaced by cash in the subscription and redemption list + the amount of cash that can be used to replace component securities in the subscription and redemption list)

The sum of the quantity multiplied by the closing price on day T + the sum of the quantity of component securities in the subscription and redemption lists that are prohibited from being replaced by cash multiplied by the closing price on day T).

Here, the expected opening price on day T = T - the closing price on day 1.

The difference between them can be seen from the formulas of the two. The estimated cash on T day is calculated by using the fund net value of the minimum subscription and redemption unit on T - 1 day and the closing price on T - 1 day, and the cash difference on T day is

It is calculated based on the fund net value of the minimum subscription and redemption unit on T day and the closing price on T day.

Thinking about the long term, the difference between pro forma cash and cash balance is not that big.