Similarities between LOF and ETF

First, both ETFs and LOF with the same two-level market have both primary and secondary markets, which can be purchased and redeemed through fund sponsors, managers, banks and other agency outlets like open-end funds. At the same time, it can also be bought and sold through the exchange system like closed-end funds.

Second, there are arbitrage opportunities in theory. Because the above two trading methods coexist, the purchase and redemption prices depend on the net asset value of the fund unit, while the market transaction price is formed by system matching, which is mainly determined by market supply and demand. There is likely to be a certain degree of deviation between them. When this deviation is enough to offset the transaction cost, there is a theoretical arbitrage opportunity. Investors can get the difference income by buying low and selling high.

third, the discount premium is small. Although the transaction price of the fund unit is affected by the relationship between supply and demand and the market of the day, it always fluctuates around the net value of the fund unit. Because of the existence of the above arbitrage mechanism, when the deviation between the two exceeds a certain degree, it will lead to arbitrage behavior, thus making the transaction price return to the net value, so its discount premium level is much lower than that of simple closed-end funds.

4. Low cost and strong liquidity. In the transaction process, there is no need for subscription and redemption fees, and only .5% of bilateral fees are required. In addition, due to the existence of both primary market and secondary market, the liquidity is obviously stronger than that of ordinary open-end funds. In addition, ETF is a passive investment, and the management cost generally does not exceed .5%, which is far lower than the 1%-1.5% level of open-end funds.

Differences between LOF and ETF

1. Different types of funds are applicable. ETFs are mainly passive investment fund products based on a certain index. Although LOF also adopts the way of listing open-end funds on the exchange, it can be used not only for passive investment fund products, but also for economic investment funds.

second, the target of subscription and redemption is different. In subscription and redemption, ETF exchanges fund shares and "basket" stocks with investors, while LOF exchanges fund shares with investors in cash.

Third, the threshold for participation is different. According to the foreign experience and the design scheme of Huaxia Fund SSE 5ETF, the basic unit of its subscription and redemption is 1 million fund units, which has a high starting point and is suitable for institutional customers and powerful individual investors. The subscription and redemption of LOF products, like other open-end funds, start from 1 fund units, which is more suitable for small and medium investors to participate.

iv. Different arbitrage operation modes and costs ETF must buy and sell a package of stocks in the process of arbitrage trading, which involves both the fund and the stock market, while the arbitrage trading of LOF only involves the trading of funds. The more prominent difference is that according to the design of ETF in Shanghai Stock Exchange, it provides investors with real-time arbitrage opportunities and can realize T+ trading, and its transaction costs are mainly impact costs besides transaction costs; At present, the trading design of LOF in Shenzhen Stock Exchange is that the fund units for subscription and redemption and the fund units for market trading are managed by China Registration System and China Clearing Shenzhen Branch respectively. Trading across the subscription and redemption market and the exchange market must go through the transfer custody between systems, which takes two trading days, so LOF arbitrage has to bear the waiting cost, which further increases the arbitrage cost.

market influence of LOF and ETF

1. LOF influences the launch of lof, which provides a new exit way and way for investors of open-end funds, and also provides a convenient trading way for investors to invest in funds. With the launch of LOF products, it is also likely to lead to a decline in the subscription and redemption costs of open-end funds in China. Because, for investors, if the gap between the transaction cost of the secondary market and the cost of the first-level subscription and redemption is too large, it is likely that the subscription will be unfavorable at the time of issuance, but the transaction will be active after listing on the exchange. LOF can build a bridge between closed-end funds and open-end funds, providing a good technical platform, which can be extended to solve the problem of turning closed-end funds into open funds if it is implemented smoothly.

second, ETF's investment strategy of influencing ETF's complete replication index will further promote the application of indexed investment concept in China stock market. ETF funds closely follow a representative index. When an investor buys a fund unit, it is equivalent to buying all the stocks of this index by weight. Therefore, as long as this index can fully reflect the trend of the general trend, investors will not have the situation of "making an index but losing money", and the profit and loss can be correctly determined depending on the trend of the general trend. ETF provides the arbitrage function of the underlying index, which will attract a large number of investors to invest in the constituent stocks of the corresponding index, and keep a close eye on the deviation between the ETF price and the portfolio value of the constituent stocks at all times, and carry out a large number of arbitrage operations until this deviation returns to the scope of arbitrage-free space. These frequent and massive arbitrage transactions will improve the activity of the underlying stock, thus promoting the liquidity of the underlying index, reducing the fluctuation of the index and maintaining market stability.