Transactional open-end index fund, commonly known as exchange-traded fund (ETF), is an open-end fund with variable fund share, which is listed and traded on the exchange.
Transactional open-end index fund is a special type of open-end fund, which combines the operating characteristics of closed-end fund and open-end fund. Investors can buy or redeem fund shares from fund management companies, and at the same time, they can buy and sell ETF shares in the secondary market at the market price like closed-end funds. However, the purchase and redemption must use a basket of shares for fund shares or use a basket of shares for fund shares.
Because there are both secondary market transactions and subscription and redemption mechanisms, investors can carry out arbitrage transactions when there is a difference between the market price of ETF and the net value of fund units. The existence of arbitrage mechanism makes ETF avoid the common discount problem of closed-end funds.
According to different investment methods, ETFs can be divided into index funds and actively managed funds. Most foreign ETFs are index funds. ETF launched in China is also an index fund.
ETF index fund represents the ownership of a basket of stocks, which refers to the index fund that is traded on the stock exchange like stocks, and its trading price and fund share net value trend are basically consistent with the tracked index.
Therefore, investors buying and selling an ETF is equivalent to buying and selling the index it tracks, and can get basically the same income as the index. Usually, it adopts a completely passive management mode, aiming at fitting an index, which has the characteristics of both stocks and index funds.
Investors can buy ETFs in two ways:
You can purchase from the fund manager according to the net value of the fund on that day (the same as ordinary open-end funds), but the minimum subscription share of ETF is usually relatively large, so it is difficult for ordinary investors to purchase in this way;
ETF can also be traded directly with other investors on the stock exchange. The trading process is similar to stock trading. The transaction price is determined by both buyers and sellers, which is often different from the net value of the fund at that time (like ordinary closed-end funds).