ETF (Exchange-traded Fund) is a trading open index securities investment fund, referred to as Exchange-traded Fund. It is an open index fund listed on the exchange, which has the advantages and characteristics of stocks, open index funds and closed index funds. It takes the component securities or commodities included in the selected index as the investment object, and makes passive investment by adopting complete replication or sampling replication according to the types and proportions of the securities or commodities that constitute the index. It is an effective index investment tool.
Transaction type means that this fund can be bought and sold on the stock exchange like a stock. The process is very simple, as long as you enter the code of the corresponding ETF fund on the stock trading software, you can entrust the order. In the process of trading, the fund share has not changed, but has been transferred between different investors.
Openness means that investors can buy or redeem shares from fund management companies. Only subscription is to exchange a basket of stocks for fund shares, and redemption is to exchange fund shares for a basket of stocks.
ETF has two remarkable characteristics. The first is the unique physical purchase and redemption mechanism, that is, investors need to buy an ETF from a fund management company in exchange for a basket of securities or commodities designated by this ETF, and what they get when redeeming is also a corresponding basket of securities or commodities.
ETF applies for physical redemption instead of cash redemption, so that the interests of the original holder will not be harmed by large or huge redemption. ETF applies for physical redemption, and investors exchange physical or physical shares, which not only can confirm the redemption in real time between trading hours, but also has no influence on the fund position of ETF, which protects the interests of the original holders to the greatest extent and avoids the additional market risk exposure caused by the time interval between the redemption operation and the realization of rights and interests. This institutional arrangement also enables ETF to track the corresponding index with higher accuracy.
ETF has a "minimum share of subscription and redemption". Only investors with a certain amount of funds can participate in the physical subscription and redemption of ETF primary market, and the participants are generally institutional investors or large households.
Second, ETF implements a trading system in which the primary market and the secondary market coexist. In the primary market, only investors with a certain capital scale (300,000 shares, 500,000 shares and more than 6,543,800 shares) can exchange shares (subscription) and shares for shares (redemption) at any time during the trading hours, and small and medium-sized investors are excluded from the primary market. This institutional arrangement makes the transaction price of ETF secondary market close to the net value of fund shares. Compared with traditional index funds, ETF has better replication effect, lower cost, more convenient trading and arbitrage trading.
ETF, a trading system in which the primary market and the secondary market coexist, makes the arbitrage trading of ETF possible. The principle is as follows
(1) When the transaction price of ETF in the secondary market is lower than its net share value, that is, a discount transaction occurs, large investors can buy ETF at a low price in the secondary market, then redeem their share in the primary market (sell it at a high price), and then sell their share in the secondary market to realize arbitrage trading.
(2) When the transaction price of ETF in the secondary market is higher than its net share value, that is, a premium transaction occurs, large investors can buy a basket of stocks in the secondary market, convert them into ETF shares in the primary market according to their net share value, and then sell the ETF at a high price in the secondary market to realize arbitrage trading.
Through principle analysis, we know that discount arbitrage will reduce the total share of ETF, while premium arbitrage will increase the total share of ETF. Under normal circumstances, arbitrage activities will make arbitrage opportunities disappear, so there are not many arbitrage opportunities, and the ETF scale changes caused by arbitrage activities will not be great. The change of ETF scale ultimately depends on the real market demand for ETFs.
There are many professional institutions in the market to carry out programmed arbitrage. When the ETF price is greater than the actual net value, they buy a basket of stocks, switch to the corresponding ETF, and then sell ETF shares in the secondary market. When the ETF price is lower than the actual net value, they buy ETFs, submit redemption instructions for a basket of stocks, and then sell the stocks to get cash.
The existence of these institutions will make the real net value of ETF closer to the transaction price of the exchange and avoid the common discount problem of closed-end funds. ETF, on the other hand, has a lower rate, no stamp duty, and only brokerage commission is used for on-site transactions. In addition, management fees and custody fees are basically at the lowest level among the three types of index fund products. From the development trend at home and abroad, ETF will become the mainstream of future on-site trading tools.
Many investors can't tell the difference between ETF and LOF. ETF is a transactional open-end index fund, while LOF is a listed open-end fund. There is a fundamental difference between the two.
LOF (Listened Open-Ended Funds) is an open-end fund, which can be used for off-site subscription or redemption of fund shares, as well as trading. Over-the-counter market and on-site market are organically linked through the transfer custody mechanism. It can be said that LOF index fund is an innovative variety of localization improvement in China.
The biggest difference between LOF fund and OTC general index fund lies in the addition of floor trading function, and the use of floor trading and OTC trading mechanism to provide investors with the net value of the fund and the floor trading price fluctuating around the net value of the fund. When the exchange price is different from the net value of the fund, there will be arbitrage opportunities.
It should be noted that the subscription and redemption efficiency of LOF funds in Shenzhen Stock Exchange and Shanghai Stock Exchange is not exactly the same. LOF funds in Shenzhen Stock Exchange generally buy fund shares on the same day, and T+ 1 can be redeemed, and the subscription fund shares on the same day can only be sold at T+2. The LOF share of SSE purchased on the same day cannot be sold, redeemed or transferred to custody on the same day, and can only be sold on the T+2 day market; Stocks bought on the same day can be redeemed and transferred to custody on the same day, but they cannot be sold.
To do arbitrage, it is necessary to estimate the net value of the index fund on that day. Because the index fund completely tracks the index, it can be estimated by combining the net value of the fund itself yesterday. Considering that the index fund has reserved 5% cash for redemption, the formula for estimating the fund's net value on that day is: the fund's net value on the previous day (1+0.95 index rises and falls). Therefore, this kind of arbitrage also has the risk of one-day net value change.
To sum up, although the principle of arbitrage is simple, it is not easy to achieve arbitrage. Many professional institutions in the market must pay attention to the pricing differences of fund products in a quantitative way. As an individual investor, it is not dominant in technology and manpower. To achieve arbitrage, it is necessary to evaluate the liquidity of LOF funds or the redemption cost of subscription and redemption.
So I suggest that for retail investors, especially non-professional fund investors, it is enough to know that there is fund arbitrage, and there is no need to spend too much time and energy on it.
Next, let's look at the difference between ETF and LOF:
Difference 1: the purchase and redemption mechanism is different.
ETF investors generally use stocks when purchasing and redeeming. Investors buy ETF shares with a basket of stocks. You usually get a bunch of stocks when you redeem them. The subscription and redemption of LOF are all completed in cash.
Difference 2: the place of purchase and redemption is different.
ETF is generally completed in the exchange, while LOF can be realized in both consignment outlets and exchanges.
Difference 3: The participation threshold is different.
The minimum requirement for ETF to have a share in the redemption application is generally at least 300,000, and some are from 6,543,800+100,000, which is a very high starting point. LOF redemption threshold is low, generally 1000 fund units. Investors who participate in LOF funds are mostly retail investors, while investors who purchase and redeem ETFs are mostly institutions.
Difference 4: Fund investment strategies are different.
ETF adopts a completely passive management mode, aiming at fitting an index of 100 million yuan, while LOF is just an ordinary open-end fund, which can be an index fund or an active fund.
Difference 5: The frequency of online quotation is different.
ETF provides the quotation of fund reference network once every 15 seconds, while LOF only provides the quotation of fund reference network once or more every day.
Difference 6: The transaction efficiency is different.
LOF fund is not as effective as ETF. For example, the LOF fund of Shenzhen Stock Exchange can be redeemed on the same day, generally T+ 1, and T+2 can be sold. Due to the time difference, in general, many LOF index foundations have higher discount premiums than ETFs.
Investors who participate in ETF subscription and redemption are generally ETF linked funds and market makers, while those who participate in LOF funds are generally retail investors, and few institutions participate in the on-site subscription of LOF funds. Compared with ETF, LOF has some shortcomings in tracking accuracy and liquidity of index funds. Its advantage is that it can realize the on-site trading of open-end funds, which has irreplaceable value for many active funds.
After understanding the characteristics of ETF and the difference between ETF and LOF, let's talk about a special fund: ETF linked fund.
ETF-linked fund is a fund that invests most of the fund assets in an ETT, that is, the target ETF, closely tracks the performance of the underlying index, and can be purchased and redeemed off-site, such as bank channels.
In terms of investment strategy, the assets invested by ETF linked funds in the target ETF shall not be less than 90% of the net asset value of the linked funds, and the rest shall be invested in the underlying index components and alternative components. The manager of an ETF-linked fund shall not accrue management fees for the ETF part of the ETF-linked fund property.
By definition, we can see that ETF-linked funds are subordinate to the main funds. The main fund does not exist, and neither does the linked fund. ETF Linked Fund mainly opens channels for small and medium-sized investors in banking channels and Internet company platforms to purchase ETFs, which can attract a large number of customers from banks and Internet platforms to directly invest in ETFs through Linked Fund, enlarge the scale of index funds and enhance the influence of ETFs. It can also provide regular fixed investment that ETF does not have at present to meet the diversified investment needs of investors.
We can regard ETF-linked fund as a special fund among funds (FOF). The market value of the target ETF held by the ETF linked fund shall not be less than 90% of the net asset value of the linked fund, and it shall not participate in ETF arbitrage.
Finally, summary: ETF funds can be selected for on-site trading and ETF linked funds can be selected for off-site investment. When choosing linked funds, we need to pay attention to transaction costs. The subscription fee is generally between 1%- 1.5%, but most internet fund sales platforms will be 1 discount, that is, the actual subscription fee is 0. 1. In order to satisfy short-term investors, most fund companies now divide ETF-linked funds into two parts, A share and C share. The only difference between the two stocks is the transaction cost. You can choose the right product according to your own needs.
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