In a nutshell, the relationship between index funds, exchange-traded funds (ETFs), and ETFs that track index funds can be summarized as follows: buying ETFs is equivalent to buying indices, and buying ETFs that track index funds is akin to buying ETFs.

As of October 22nd, out of the 802 voting ETFs in the entire market, 546 ETFs have corresponding ETFs that track index funds, accounting for nearly 70%. Thus, it can be said that exchange-traded ETFs and ETFs that track index funds are like twins, inseparable.

We have already learned a lot about ETFs, but did you know? ETFs that track index funds are not as simple as buying and redeeming; compared to ETFs, they also carry many risks.

Risk One: ETFs that track index funds may have purchase limits or even be suspended, making them not always available for purchase.

For example, recently, due to the high volatility of the North Index 50, there are no ETFs in the entire market, and many investors have turned to ETFs that track index funds outside the exchange. These funds have become highly sought after, leading many fund companies to announce purchase limits or even directly close subscriptions, effectively "closing the door to customers."

Advertisement

Cross-border index funds that track index funds also frequently have purchase limits, as they involve issues related to QD quotas.

Therefore, investors should pay special attention to announcements regarding "purchase limits" and "suspensions" when buying ETFs that track index funds. If they wait for share confirmation indefinitely or even fail to confirm shares, it will unnecessarily tie up funds.

Risk Two: If the market becomes overheated, the difference in returns between ETFs that track index funds and ETFs will widen.

Take the financial technology theme that led the bull market in its early stages as an example. The related ETFs continuously hit their upper limits, and many investors could not buy in, so they had to turn to ETFs that track the financial technology index. However, it was found that compared to ETFs, some ETFs that track index funds had a stage return that was more than double. What's even more tragic is that if they couldn't keep up during the upward phase, during the downward phase, the decline of the ETFs that track the index funds was actually greater than that of the corresponding ETFs.Why is this the case? Primarily, it is due to the operational mechanism of ETF feeder funds and the combined effect of extreme market conditions.

The position limit for ETF feeder funds is capped at 95%, with a minimum of 90%, because it is necessary to reserve 5% to 10% of cash and bonds to address the risk of fund redemptions, thus preventing full-capacity operation. This leads to a situation where, during significant increases or even daily price limits in ETFs, the income gap can easily widen.

Furthermore, if there is a concentrated purchase of shares outside the market, and the corresponding tracking index continues to rise sharply, the cost of replenishing shares can increase or become unattainable, which can further widen the gap between the feeder fund's returns and those of the ETF and the target index.

This issue is particularly prominent in feeder funds for small-scale industry-themed ETFs that experience consecutive daily price limits.

Risk Three: Feeder funds are not suitable for investors with high requirements for capital flexibility.

Unlike intraday matching transactions of ETFs, the subscription and redemption of feeder funds rely on the confirmation of the fund manager.

In terms of capital utilization efficiency, the confirmation of shares for ETF feeder funds is the fastest on T+1 day (postponed by one day after 3 PM);

Redemption is the fastest on T+2 day, and it can also take three to four trading days to credit the account.

Risk Four: Feeder funds are not suitable for swing trading.Many investors aim to profit from short-term market fluctuations by investing in ETF feeder funds, only to discover upon selling that:

If held for less than 7 days, a punitive redemption fee of 1.5% is charged...

Therefore, it is particularly important to pay attention to the fee rates when investing in feeder funds, which are more suitable for long-term investors. The longer the holding period, the lower the redemption fee, and it is 0 after more than two years; investors who aim for short-term gains are better off choosing ETFs.

Risk Five: Avoid buying feeder funds with too small a scale.

We know that if the scale of an ETF traded on the exchange is too small, it will delay transactions and there is a risk of liquidation. Similarly, feeder funds should not be purchased if they are too small in scale, as this can affect transaction efficiency and cause loss of returns.

On one hand, the larger the scale, the relatively smaller impact of large subscriptions and redemptions on the fund, avoiding delayed confirmation and redemption, which may result in the final confirmed net value of the fund shares being different from the net value at the time of the redemption application submission;

On the other hand, feeder funds that are too small in scale also suffer in terms of supplementary voucher and cash position management, which ultimately affects the tracking error of the fund's index.

Since there are also many risks associated with feeder funds, why do many "stubborn" investors prefer to buy feeder funds instead of ETFs traded on the exchange? The reasons are mainly these:

1. With a single click on the fund account, there is no need to open a separate securities account;

2. There is no need to worry about the risk of premium, as the subscription price is confirmed according to the net value price of the day;Three, there is no need to monitor the market in real-time, avoiding the chase of rising prices and the killing of falling prices, and holding for the medium to long term is more worry-free;

Four, you can set up automatic fixed investment, which is disciplined and can continuously reduce the holding cost.

Considering the risks and convenience mentioned above, for investors who want to buy connected funds, we recommend choosing broad-based varieties that are less volatile and have relatively lower risks of continuous upward movements.

Recently, Huaxia Fund is also raising funds for the CSI A500 ETF connected fund A/C (code: 022430/022431). As a "big factory" of indices (see note *), it has a wide range of products and nearly 20 years of rich experience in index management, which can skillfully deal with various market conditions, and investors can pay attention.

Should you choose A or C for connected funds? Generally speaking, long-term A and short-term C.

Long-term and large investors are suitable for buying Class A (the longer the holding time, the lower the redemption fee), and those who are short-term can choose Class C (redemption fee is 0 if held for more than 7 days, less than 7 days the redemption fee rate is 1.50%, no subscription fee, and a 0.25% sales service fee).