ETF, ETF Linked Fund and LOF are all innovative fund products and good investment tools, which are worthy of our attention.
Here, I will first introduce the concepts of these three fund products in detail, and then talk about their differences, advantages and disadvantages. I’d better give some investment advice.
Author: Return Index Investment
Source: Snowball
ETF, the full name of which is Exchange Traded Fund, is a revolutionary and innovative investment product. Since it was born in North America in 1990s, it has developed rapidly around the world and has become the most popular fund product in the global capital market.
The following figure shows some common ETFs:
Simply put, ETF is an indexed investment tool, and it is convenient to buy and sell a basket of securities in the index tracked by ETF by buying and selling ETF, so ETF is essentially an index fund.
Moreover, investors can buy and sell ETFs at the latest market price in the stock exchange (secondary market) like buying and selling stocks, and they can also purchase or redeem ETF shares from fund companies (primary market). However, the redemption of ETFs must be in kind, not in cash.
The so-called physical redemption means that a basket of shares must be exchanged for ETF shares from the fund company when purchasing ETF, and a basket of shares must be exchanged for ETF shares from the fund company when redeeming.
There are three core features of ETF: index fund, trading fund and physical redemption. Specifically, we will talk about the following:
(1) Index funds
The index fund is different from other funds in that it tracks the underlying index, that is to say, the index fund tracks an index, which contains those constituent stocks, and the index fund invests in these stocks.
The emergence of index funds originated from the idea of indexed investment. In 1952, Markowitz put forward a diversified investment concept and advocated portfolio investment, which greatly promoted the prosperity of mutual funds in the United States at that time.
At that time, the fund was still managed by fund managers, and the strategy of active investment was adopted. However, the performance of mutual funds was not good, and time told investors that it was almost impossible to try to beat the market through active investment. With the effective market hypothesis deeply rooted in people’s hearts, people began to accept passive investment strategy and tried to find an investment product close to the index to get market income as much as possible. As a result, index futures, index participation shares, Toronto index participating units and other index products have emerged, and index funds also belong to the product of this concept.
ETF is essentially a special index fund, which has a series of characteristics of index funds.
Investing in ETF is equivalent to investing in the stock index tracked by ETF, expecting to obtain the same risk-return performance as the tracked stock index.
Of course, ETF also has a series of advantages of index funds, such as diversification of investment risks, passive investment, convenient investment and low fund management fee rate.
(2) Trading funds
ETF is listed and traded on the stock exchange. During the trading hours, it can be bought and sold freely at the market price like stocks, which ensures the high liquidity of ETF.
Unlike ordinary index funds, which publish their net value once every trading day, ETFs publish their fund share reference net value (IOPV) every 15 seconds during trading hours. IOPV can be regarded as the real-time approximate net value of ETFs, which is convenient for investors to effectively judge whether the latest market transaction price of ETFs deviates from its intrinsic value.
When the market transaction price of ETF deviates from its IOPV to a certain extent, arbitrage opportunities will arise. The greater the deviation, the greater the arbitrage space, which will attract more funds to arbitrage and bring the market transaction price of ETF back to IOPV.
From the actual situation of A stock market, the difference between the market price of general ETF and IOPV is very small, basically within 0.2%.
(3) physical redemption
For ordinary index funds, when investors purchase from the fund company, they purchase from the fund company in cash. After receiving the cash from investors, the fund company will buy a basket of index stocks in the secondary market and register new fund shares for investors. The situation is similar at the time of redemption. The fund company needs to sell a basket of index stocks in the secondary market and then pay the cash to investors.
The way of cash redemption will lead to a larger error between the performance of index funds and the tracked index, and the greater the market fluctuation, the greater the error. In addition, the process of buying and selling stocks will also increase additional handling fees.
For ETF, when investors purchase ETF shares from fund companies, they must use a basket of stocks corresponding to ETF to exchange ETF shares with fund companies instead of cash. Correspondingly, when investors redeem ETF shares from fund companies, they get a basket of stocks instead of cash.
In other words, the redemption of ETF is a barter transaction, while the redemption of ordinary index funds is a currency-based transaction.
The physical redemption mechanism is a major feature of ETF, which makes the fund company save the link of buying stocks in cash and selling stocks in response to redemption, which greatly reduces the error of ETF in tracking the return performance of the target index, and also reduces the transaction cost loss of fund assets in the process of buying and selling.
General index funds can generally track the return performance of the target index to 95%, while ETF pursues 100% consistency with the return performance of the target index.
ETF Linked Fund, in layman’s terms, is a fund of funds, because it invests in ETFs. For example, Bosera SSE 50ETF Linked Fund is a fund that invests most of its assets in Bosera SSE 50ETF (at least 90% of the total assets).
ETF linked funds belong to OTC funds, that is, they indirectly invest in ETFs on the market through OTC channels.
LOF, whose Chinese name is listed open-end fund, is a kind of open-end fund, but it is a little different from open-end fund. The difference is that LOF can be traded on the exchange and can be purchased and redeemed off-site. It is an open-end fund that organically links the OTC market and the OTC market through the transfer custody mechanism.
LOF has both active management and passive tracking of stock indexes. The main difference between index LOF and ETF is that LOF is not a physical redemption, but a cash redemption.
ETF-linked funds can only be purchased and redeemed in the primary market, and support fixed investment (ETF does not support fixed investment, but fixed investment is only an investment strategy that can be implemented manually). The purchase channel of ETF-linked funds is securities companies, while the purchase channels of ETF-linked funds are third-party sales channels, banks and fund companies.
Similarities: both are dual trading mechanisms, which can be traded in the secondary market and redeemed outside the market.
Difference:
(1) The redemption mechanism is different.
ETF uses a basket of stocks to purchase and redeem, which belongs to barter, while LOF uses cash to complete the redemption operation.
(2) the transaction efficiency is different
ETFs can realize T+0 trading, that is, ETFs purchased on the same day can be sold on the secondary market on the same day, and ETFs bought on the secondary market can be redeemed on the primary market on the same day. The LOF bought on the same day can usually be redeemed on T+1 day and sold on T+2 day, and the transaction speed and the efficiency of capital use will be greatly reduced.
(3) The participation threshold is different
The minimum requirement for ETF to have a share in the application for redemption is generally 300,000 shares, while the LOF threshold is low, and investors are mostly retail investors.
If you want to invest in ETF, ETF-linked fund and LOF index funds, I can also give you some suggestions on investment:
Commonly used valuation indicators are: PE (P/E ratio), PB (P/B ratio), PS (P/E ratio), PEG (P/E ratio relative to profit growth ratio) and NAV (net asset value).
In addition, there are two considerations about the use of valuation data:
First, the historical valuation of an index has reference value only after it has experienced at least two bull and bear markets;
Second, investing in different industries requires different valuation indicators, and it is necessary to analyze specific issues.
PE quantile = current valuation ranking/total historical valuation, which represents the historical ranking of the valuation of securities such as indexes or stocks at the current time.
The following figure shows the ranking of the indexes after ranking according to the PE quantile from large to small today, in which the low-carbon PE quantile in the mainland is 97.9%, indicating that the valuation level at that time is higher than the historical level of 97.9%.
Generally speaking, it can be said that the PE quantile is more than 70%, which is called high valuation, and the PE quantile is less than 30%, which is called low valuation, and the PE quantile is between 30% and 70%, which is called moderate valuation. When we buy a fund, we have to buy undervalued and sell overvalued, so that we can make a profit.
General indicators include turnover rate, on-site turnover, etc. In addition, ETF with market makers has higher liquidity, because the large amount of buying and selling orders hanged by market makers can meet the trading needs of investors in time.
One is the deviation of the price of the fund in the secondary market from the net value of the fund. If the transaction price in the secondary market is lower than the net value of the fund, it is called a discount, and if it is higher, it is called a premium.
Generally speaking, buy at a discount and sell at a premium.
In addition, the discount rate is an important indicator to judge the performance of the fund market. The higher the absolute value of the discount rate, the weaker the liquidity of the ETF is implied.
Tracking error refers to the difference between the return rate of index fund and the return rate of the underlying index. The investment goal of ETF is to closely track the underlying index, so the tracking error is also an important factor to measure the quality of an ETF.
Generally speaking, the management rate of ETF is 0.5%, and the custody rate is 0.1%. The management rate of active funds is 1.5%, and the management rate of graded index funds is 1%.
Although there seems to be little difference in rates, even a slight difference in fees will cause a huge long-term income difference after considering the compound interest effect.
Therefore, in the case of the rate, it can be saved. Under other conditions, the ETF with lower rate is preferred.
Although ETF is a passively managed fund, the research management ability of fund managers and their companies is not as close as that of active funds, the management ability and scale of fund companies are still closely related to the tracking error, operating cost and liquidity of ETF.
Generally speaking, large-scale and diverse fund companies have more credibility and experience in the market.
However, the bigger the fund, the better. Generally, when its scale reaches more than 200 million, the impact of this part of the fund performance will be minimal.
Sharp’s ratio is equal to the ratio of ETF’s excess return to its standard deviation of return, which means that the excess return that ETF can generate for each additional unit of total risk is a measure of ETF’s risk premium ability.
