1. ETF and ETF Classification#
ETF (Exchange Traded Fund) is commonly known as Exchange Traded Fund and is a type of open-end fund that is listed and traded on the exchange. In simple terms, an ETF is a basket of stocks, and different ETFs are baskets of stocks with different proportions. Taking 180ETF as an example, as shown in Figure 1, bank stocks have a relatively high proportion in 180ETF, so bank stocks have the most significant impact on the movement of 180ETF. Different ETFs also have different concentrations of stocks in different industries. For example, in the case of dividend ETF, as shown in Figure 2, the manufacturing industry accounts for nearly 50%, so steel stocks have the most significant impact on the movement of dividend ETF.
Figure 1 180ETF Portfolio#
(Source: Eastmoney)
Figure 2 Dividend ETF Industry Allocation#
(Source: Eastmoney)
ETFs can be roughly classified into stock ETFs, bond ETFs, commodity ETFs, and currency ETFs based on their investment targets. The most common type is stock ETFs.
Stock ETFs, also known as index ETFs, can be further classified into size index ETFs, sector index ETFs, theme index ETFs, strategy index ETFs, and style index ETFs based on the different indices they track.
Size index ETFs, also known as broad-based ETFs, mainly track major indices such as the CSI 300, ChiNext, and CSI 500. They are generally compiled using market capitalization weighting, where stocks with larger market capitalization have higher weights. In addition to domestic indices, size index ETFs also provide cross-border investment opportunities, such as investing in the S&P 500 (513500) and Nasdaq ETFs (513100), investing in the Nikkei with Nikkei ETFs (513520) and Nikkei 225 (513880), and investing in the DAX with the Germany 30 (513030). Size index ETFs are the largest in terms of fund size in the ETF market, with fund sizes reaching billions. For example, the fund size of the SSE 50 is 46.191 billion (as of December 31, 2019). However, according to data from Eastmoney, as of April 17, among the 85 broad-based ETFs included in the statistics, 61 have experienced a decrease in size this year, accounting for 72% of the total; the overall number of shares of broad-based ETFs has decreased by 8.224 billion. For example, the shares of Taikang 300 ETF have decreased from 7.161 billion at the beginning of the year to the current 1.788 billion. In addition, the shares of ICBC SSE 50, Ping An CSI 300, E Fund MSCI, and Huatai CSI 800 ETFs have also decreased significantly. The outflow of funds has a greater impact on smaller broad-based ETFs, with more than 30% of them falling below 100 million shares.
Sector index ETFs and theme index ETFs focus on selecting stocks in specific sectors or themes. Although they have some similarities, there are also some subtle differences. For example, the Communication ETF (515880), also known as Guotai CSI All Share Communication Equipment ETF, mainly holds stocks related to the communication equipment industry. On the other hand, the recently popular 5G ETF (515050), also known as Huaxia CSI 5G Communication Theme ETF, does not necessarily hold communication equipment stocks, but also includes concept stocks related to 5G, such as Luxshare Precision and GoerTek, which are part of the Apple ecosystem, as shown in Figure 3.
Figure 3 Comparison of Communication ETF and 5G ETF Holdings#
Sector index ETFs and theme index ETFs also have different sizes and popularity. Taking the most active theme index ETFs in recent times as an example, the trading volume in the past week is shown in Figure 4. It can be seen that large-scale theme index ETFs, such as the 5G ETF, have trading volumes comparable to size index ETFs, such as the CSI 300 ETF (515300) with a trading volume of 6.3 billion. In addition, the new energy vehicle ETF, securities firm ETF, and GF chip ETF from Ping An Fund also have significant increases in fund size. Compared to institutional investors who prefer size index ETFs, individual investors tend to prefer sector index ETFs or theme index ETFs.
Figure 4 Recently Active Theme Index ETFs#
Strategy index ETFs are compiled based on weighted strategies, including dividend, fundamental, low volatility, and value strategies.
- Dividend: Weighted by dividend yield. Stocks with higher dividend yields have higher weights.
- Fundamental: Weighted by fundamental indicators (including revenue, cash flow, net assets, and dividends).
- Low Volatility: Weighted by volatility. Stocks with lower volatility have higher weights.
- Value: Weighted by valuation indicators (including P/E ratio, P/B ratio, P/CF ratio, and dividend yield).
Strategy index ETFs have smaller sizes in the ETF market, except for the ChiNext 50 (approximately 5.5 billion), and their market participation is also relatively low.
Style index ETFs are similar to size index ETFs, but their market participation is the lowest among all ETFs due to their similarity to size index ETFs.
2. What is IOPV#
IOPV stands for Indicative Optimized Portfolio Value, which refers to the estimated net asset value (NAV) per share of an ETF. It is calculated by the stock exchange based on the calculation method provided by the fund manager and the daily creation and redemption list provided by the ETF, using the latest transaction prices of the securities in the list, and is published every 15 seconds. The IOPV value is usually displayed in the ETF market interface of stock market software. IOPV can be used as an estimate of the NAV per share of an ETF and as a reference indicator to measure whether the secondary market trading price of an ETF is reasonable.
3. ETF Arbitrage Strategies#
Exchange Traded Funds (ETFs) are a special type of open-end fund that combines the characteristics of closed-end funds and open-end funds. Investors can purchase or redeem ETF shares from the fund management company, and they can also buy and sell ETF shares on the secondary market at market prices, similar to closed-end funds. However, the purchase and redemption of ETF shares must be exchanged for a basket of stocks or vice versa, as shown in Figure 5. The value of one ETF share is equivalent to the value of the basket of stocks corresponding to the ETF.
Figure 5 ETF Creation and Redemption#
According to the relevant regulations of the Chinese securities exchanges, the following rules apply to the buying, selling, purchasing, and redeeming of ETF shares:
- ETF shares purchased on the same day can be sold on the same day but cannot be redeemed.
- ETF shares purchased on the same day can be redeemed on the same day but cannot be sold.
- Securities redeemed on the same day can be sold on the same day but cannot be used to purchase ETF shares.
- Securities purchased on the same day can be used to purchase ETF shares. According to the trading rules of ETFs, the arbitrage strategies for ETFs are as follows:
When the ETF price is higher than the IOPV, buy the basket of stocks corresponding to the ETF, purchase ETF shares, and sell the ETF. The trigger condition is: ETF price - IOPV > transaction costs. The purchase of the basket of stocks corresponding to the ETF can refer to the buy and purchase operations in Figure 6.
When the ETF price is lower than the IOPV, buy the ETF, redeem the corresponding basket of stocks, and sell the basket of stocks. The trigger condition is: IOPV - ETF price > transaction costs. The redemption and sale of the basket of stocks can refer to the redeem and sell operations in Figure 6.
Figure 6 ETF Arbitrage System#
(Source: Ping An Technology)
Figure 7 Huatai Securities ETF Product - MATIC#
