Come on if you don’t understand ETFs!

The most comprehensive ETF science post in history!

ETF (Exchange Trades Funds) is a trading open-end index securities investment fund, referred to as an exchange-traded fund. It is an open-end index fund listed and traded on an exchange. It has the characteristics of stocks, open-end index funds and closed-end index funds.

Advantages and characteristics: It takes the component securities or commodities included in a selected index as investment objects, and adopts complete replication or sampling replication based on the types and proportions of the securities or commodities that constitute the index for passive investment. It is an efficient method.

Indexed investment tools.

Traded, meaning the fund can be bought and sold like stocks on the stock exchange.

The process is very simple. Just enter the code of the corresponding ETF fund on the stock trading software and you can place an order.

During the transaction, the fund shares did not change, but were transferred between different investors.

Open-ended means that investors can purchase or redeem shares from the fund management company.

It's just that the subscription is to exchange a basket of stocks for fund shares, and the redemption is to exchange fund shares for a basket of stocks.

ETFs have two distinctive features.

First, the unique physical subscription and redemption mechanism means that when investors subscribe to an ETF from a fund management company, they need to exchange it for a basket of securities or commodities designated by the ETF. When redeeming, they will also receive the corresponding basket of securities or commodities.

.

ETFs use physical stocks rather than cash for redemption, so that the interests of original holders will not be damaged due to large or huge redemptions.

Since ETFs use physical stocks to apply and redeem, investors can exchange physical shares for shares or shares for physical shares. Not only can the application and redemption be confirmed in real time during the session, it will have no impact on the fund position of the ETF, protecting the interests of the original holders to the greatest extent.

, and at the same time, it also avoids the additional market risk exposure caused by the time interval between the submission of the subscription and redemption operation and the realization of the rights and interests of the subscriber.

Such institutional arrangements also allow ETFs to track the corresponding index with higher accuracy.

ETFs have "minimum subscription and redemption shares" regulations. Only investors with funds reaching a certain scale can participate in the physical subscription and redemption of ETF primary markets. Participants are generally institutional investors or large investors.

Second, ETF implements a trading system in which the primary market and the secondary market coexist.

In the primary market, only investors with funds reaching a certain scale (300,000 shares, 500,000 shares, and more than 1 million shares) can exchange shares for shares (subscription) or shares for shares (redemption) at any time during trading hours.

) transactions, small and medium investors are excluded from the primary market.

This institutional arrangement makes the ETF secondary market transaction price closer to the net value of fund shares. Compared with traditional index funds, ETFs have better replication effects, lower costs, more convenient buying and selling, and can conduct arbitrage transactions.

The trading system of ETF, where the primary market and the secondary market coexist, makes the arbitrage trading of ETF possible. The principle is that (1) when the trading price of the ETF in the secondary market is lower than the net value of its shares, that is, when a discount transaction occurs, large investments

Investors can realize arbitrage transactions by buying ETFs at low prices in the secondary market, then redeeming (selling them at high prices) the shares in the primary market, and then selling the stocks in the secondary market.

(2) When the trading price of ETF in the secondary market is higher than the net value of its shares, that is, when a premium transaction occurs, large investors can buy a basket of stocks in the secondary market and convert them into ETFs based on the net value of the shares in the primary market (equivalent to

Buy ETF) shares at a low price, and then sell the ETF at a high price in the secondary market to achieve arbitrage transactions.

Through principle analysis, we know that discount arbitrage will reduce the total share of ETFs, and premium arbitrage will increase the total share of ETFs.

Under normal circumstances, arbitrage activities will make arbitrage opportunities disappear, so there are not many arbitrage opportunities, and the changes in the size of ETFs caused by arbitrage activities will not be large.

Changes in ETF size ultimately depend on the real market demand for the ETF.

There are many professional institutions in the market that engage in programmatic arbitrage. When the ETF price is greater than the actual net value, they buy a basket of stocks, exchange them for the corresponding ETF, and then sell the ETF shares in the secondary market; when the ETF price is less than the actual net value

, they buy the ETF, submit a redemption order in exchange for a basket of stocks, and then sell the stocks to get cash.

The existence of these institutions will bring the actual net value of the ETF closer to the exchange trading price, avoiding the discount problem common to closed-end funds.

ETF rates are lower and there is no stamp duty. On-exchange trading only has brokerage commissions.

In addition, management fees and custody fees are basically at the lowest level among the three types of index fund products.

Judging from domestic and international development trends, ETFs will become the mainstream of on-site trading tools in the future.

Many investors can't tell the difference between ETFs and LOFs. ETFs are exchange-traded open-end index funds, while LOF are listed open-end funds.

There are fundamental differences between the two.

LOF (Listed Open-Ended Funds) is a fund share that can be purchased or redeemed over the counter, bought or sold, and the over-the-counter market and the on-site market are organically linked through a custody transfer mechanism.

Open-end funds.