Transactional open-end index fund, commonly known as exchange-traded fund (ETF), is an open-end fund with variable fund share (see Figure 2- 1 for the trading mode of ETF). ETF originated in Canada, but its development and maturity are mainly in the United States. Generally, ETF funds use passive investment strategy to track the market index of a certain target, so they have the characteristics of index funds.
ETF combines the operating characteristics of closed-end funds and open-end funds. Investors can not only buy and sell in the secondary market of the exchange like closed-end funds, but also purchase and redeem like open-end funds. The difference is that its subscription is to exchange a basket of shares for ETF shares, and when it is redeemed, it is to exchange a basket of shares instead of cash. This trading system enables such funds to have an arbitrage mechanism between the primary and secondary markets, which can effectively prevent similar closed-end funds from being greatly discounted.
1990, Toronto Stock Exchange (TSE) launched the world's first ETF-Index Participation Share (TIPs). 1993, the first ETI-in the United States-Standard & Poor's Depositary Receipt (SPDRs) was born, and then ETF began to develop rapidly in the United States. According to the statistics of American Association of Investment Companies, by the end of 2007, there were 629 ETF products in the United States, with a total asset value of $608.4 billion. ETF has become one of the fastest growing fund varieties in the American fund market.
The first ETF in China was established in SSE 50ETF at the end of 2004. By the end of 2007, there were five ETFs in China with assets of 22.97 billion yuan.
First, the characteristics of ETF
ETF has the following three characteristics:
Passive index fund
ETF takes the component securities contained in the selected index as the investment object, and adopts the method of complete replication according to the types and proportions of the stocks that constitute the index. ETF not only has all the characteristics of traditional index funds, but also is a purer index fund.
(2) Unique physical purchase and redemption mechanism.
The so-called physical purchase and redemption mechanism refers to the fact that investors need to exchange a package of shares designated by the ETF when purchasing the ETF from the fund management company; Redemption is not cash, but a corresponding package of shares; If you want to cash out, you need to sell these shares again. The physical purchase and redemption mechanism is the biggest feature of ETF, which saves the link of buying stocks in cash and selling stocks for redemption. In addition, ETF has a "minimum share of subscription and redemption", and only large investors can participate in the physical subscription and redemption of ETF primary market.
(three) the implementation of the primary market and the secondary market coexist trading system.
ETF implements a trading system in which the primary market and the secondary market coexist. In the primary market, large investors can trade shares (subscription) and shares (redemption) at any time during the trading hours, and small and medium investors are excluded from the primary market. In the secondary market, ETFs are listed and traded like ordinary stocks. Both large investors and small and medium investors can trade ETF shares at market prices. The existence of the primary market makes it impossible for the transaction price in the secondary market to deviate too much from the net value of fund shares, otherwise the price difference between the two markets will trigger arbitrage trading. Arbitrage trading will eventually make the arbitrage opportunity disappear and make the secondary market price return to the net value of fund shares. Therefore, under normal circumstances, the transaction price of ETF secondary market is always close to the net value of fund shares.
ETF is essentially an index fund, so the demand for ETF is mainly reflected in the demand for index products. Arbitrage caused by the price difference between the primary market and the secondary market is a derivative demand. Compared with traditional index funds, ETF has better replication effect, lower cost, more convenient trading (trading day can be bought and sold at any time) and arbitrage trading, so it has unique appeal to investors.
Second, the arbitrage trading of ETF.
When the price of the same commodity is inconsistent in different markets, arbitrage will occur. Traditionally, a fixed number of securities, such as stocks and closed-end funds, will form the trading characteristics that the secondary market price is independent of its own net value under the action of supply and demand. However, securities with uncertain quantity, such as open-end funds, cannot form secondary market prices and can only be traded at net value. The uniqueness of ETF lies in the institutional arrangement of simultaneous trading in primary market and secondary market. Therefore, when there is a difference between the transaction price of ETF secondary market and the net value of fund shares, investors can carry out arbitrage trading.
Specifically, when the transaction price of ETF in the secondary market is lower than its net share value, that is, when 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. On the contrary, when the transaction price of ETF in the secondary market is higher than its net share value, that is, when 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. The existence of arbitrage mechanism will force the secondary market price of ETF to be consistent with the net value, so that ETF will not have the phenomenon of large discount trading and large premium trading in the secondary market of closed-end funds, and also overcome the weakness that open-end funds cannot conduct intraday trading.
Discount arbitrage will lead to the reduction of ETF's total share, while premium arbitrage will lead to the expansion of ETF's total share. But in general, 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.
Third, the types of ETFs
According to the different indexes tracked by ETFs, ETFs can be divided into stock ETFs and bond ETFs. In stock ETF and bond ETF, it can be further subdivided according to different indexes tracked by ETF. For example, stock ETFs can be further divided into global index ETFs, comprehensive index ETFs, industry index ETFs and style index ETFs (such as growth and value). ).
According to the different replication methods, ETFs can be divided into complete replication ETFs and sampling replication ETFs. Fully replicated ETFs are constructed according to the weights of all constituent stocks in the index. The first ETF in China, SSE 50ETF, adopts complete replication. In the case of a large number of constituent stocks of the underlying index and insufficient liquidity of individual constituent stocks, the effect of sampling and copying may be better. Sampling replication is to select some representative constituent stocks in the index, design the combination ratio of sample stocks with reference to the proportion of index constituent stocks in the index, and construct an ETF. The purpose is to establish a sample portfolio with the lowest transaction cost, so that ETF can better track the index.
Fourth, the risk of ETF.
First of all, ETF, like other index funds, inevitably bears the systemic risks faced by the index it tracks. Secondly, although the existence of arbitrage makes the transaction price in the secondary market not deviate too much from the net value of fund shares, due to the influence of supply and demand, the price in the secondary market is often higher or lower than the net value of fund shares. In addition, there is often a tracking error between the return of ETF and the return of the tracked index. Sampling and copying, cash retention, fund dividends and fund handling fees will all lead to tracking errors.
ETF analysis of verb (abbreviation of verb)
When investing in ETF, investors need to know what index ETF tracks first, analyze the constituent stocks contained in the index, and understand the index construction method is essential. The return indicators used to analyze ETF include the secondary market price return rate and the fund net return rate. The indexes used to analyze the operation efficiency of ETF mainly include discount rate, turnover rate, expense rate, tracking deviation and tracking error.
The discount (overflow) rate of ETF is similar to that of closed-end fund, which is equal to the ratio of the secondary market price to the net value of fund shares minus 1.
When the discount (premium) rate is greater than a certain range, it will trigger arbitrage trading. At the same time, the discount (premium) rate is also an indicator reflecting the trading efficiency of ETF and the strength of market liquidity.
The turnover rate is usually expressed in days or weeks, which is equal to the ratio of ETF secondary market turnover to ETF total share.
As a passive index fund, ETI's investment goal is not to surpass the performance of the index, but to realize the basic income with the index, so the deviation between the fund income and the target index income becomes an indicator to judge the success of ETF. The smaller the deviation, the better the ETI tracking index. The degree of deviation can be measured by tracking error and tracking deviation.
Daily tracking error = daily net income of =ETF-daily income of the underlying index
Tracking error can also be expressed by month, season, etc.
The tracking deviation is equal to the standard deviation of the tracking error during the investigation.