The "physical purchase and redemption" mechanism of ETF is the essence of this product structure, and it is this mechanism that forces the ETF price to be consistent with the net value, greatly narrowing the discount (overflow) price range of ETF. In most cases, arbitrage must be bought or redeemed. The arbitrage behavior of ETF is briefly described as follows:

First of all, when the ETF quotation in the exchange market is lower than its net asset value, that is, when there is a discount, the institution can buy a large number of ETFs in the secondary market at a price lower than its net asset value, then redeem a basket of stocks in the primary market and sell them in the secondary market to earn the difference. This arbitrage mechanism will make the transaction price of ETF in the exchange market enter the market in the form of institutional arbitrage, thus driving the quotation to rise and narrowing the discount gap, which has the effect of making the market transaction price of ETF tend to be consistent with the net value of fund shares.

Secondly, when the quotation of ETF in the exchange market is higher than its net asset value, that is, there is a premium, institutions can buy a basket of stocks in the secondary market, then buy ETFs in the primary market, and then sell ETFs bought in the secondary market at a price higher than the net fund share to earn the difference. This arbitrage mechanism will make the transaction price of ETF in the exchange market arbitrage and sell by institutions, thus driving the quotation to fall, narrowing the premium gap, and also producing the effect of making the market transaction price of ETF consistent with the net value of fund shares.

It is precisely because of this arbitrage mechanism that institutions are willing to actively participate in ETF transactions, thus driving the ETF market to be active. When the arbitrage activity in the ETF market of the exchange is more active, the discount and premium space of ETF will gradually shrink; When the quotation of ETF in exchange market tends to be consistent with the net asset value, it will strengthen the willingness of ordinary small and medium-sized investors to invest in ETF, and then promote the overall ETF market to develop more vigorously. Therefore, this arbitrage mechanism is a very key factor to promote institutions and small and medium-sized investors to actively enter the market, and it is also an indispensable factor to shape a successful ETF.