## ETF

We'll introduce Exchange Traded Funds or ETFs.

ETFs : Exchange Traded Funds 复数，指的是一类基金

## How ETFs are Used

### How ETFs are used in Trading

ETFs make it easier to invest in commodities and international stocks.
ETFs are also used for hedging (we’ll see how a bit later).
ETF使投资商品和国际股票变得更加容易。 ETF也用于套期保值（我们稍后会看到）。

Commodities(商品) are raw materials that are interchangeable and tradable. Commodities include energy, precious metals, and agriculture.

### Commodity Futures(商品期货)

Futures contract are standardized agreements between two parties to trade an asset at a future date, at a predetermined price.

The participant who agrees to buy is “long” the future.
The participant who agrees to sell is “short” the future.

If you entered into a futures contract and wish to cancel, or “close” your position, you may do so by entering into an opposing position in the same asset, at the same due date.

Note that futures are a form of standardized “forward contract.” A forward contract is a specific agreement between two parties that isn’t standardized for other buyers or sellers. Since forward contracts are tailored specifically by the two counterparties, they’re not tradable like futures contracts. Forward contracts are also referred to as “bespoke”, which is just another word for “custom made” or “tailor made”.

Futures contracts have standard contract sizes, (also called “lot sizes”), and also standard due dates. An example of a standard contract size is the NYMEX Gold Futures, which has a contract size of 100 troy ounces. Since futures are standardized, they are tradable.

### Commodity ETFs

Investors who wish to gain exposure to commodities may buy futures contracts, but this requires them to roll over their positions regularly. Rolling over a futures contracts involves closing out the existing position before its due date and then taking a new position that is due at a later date. Commodity ETFs handle this, so investors could more easily buy and hold shares in a commodity ETF and not worry about rolling over individual futures contracts.

### International ETFs

If investors wish to trade international stocks, these stocks would be listed on a stock exchange of another country, and may be in a different time zone. This means that trading is done during the stock exchange’s open hours, which may not be as convenient for the investor. International ETFs are traded on a local stock exchange, while they are still linked to the stocks that are listed abroad (you’ll see how later in this lesson). So investors can trade international ETFs during the open hours of their local stock exchange.

## Hedging

### Hedging with ETFs

Hedge funds use ETFs for hedging purposes. They may construct a portfolio that optimizes their exposure to certain stocks that they believe will perform well, and in order to cancel out general market movements, they may also short an ETF that contains a similar set of stocks. They may also short sector-specific ETFs if they wish to have a neutral exposure to those sectors.

ETF Sponsors are the financial institutions that issue ETFs. We can think of them as most similar to the fund managers of mutual funds, because they design a portfolio and issue ETF shares. ETF Sponsors may generally charge lower fees compared to other types of funds, in part because of some efficiencies that make it cheaper to run the fund. We’ll learn about some operational efficiencies later in the lesson.
ETF赞助商是发行ETF的金融机构。我们可以认为它们与共同基金的基金经理最相似，因为他们设计投资组合并发行ETF股票。与其他类型的基金相比，ETF赞助商通常可以收取较低的费用，部分原因是一些效率使得运营基金的成本更低。我们将在本课程的后面部分了解一些运营效率。

## Authorized Participants(授权参与者)

Authorized Participants (APs) and ETF Sponsors partner together to make the ETF system work. We can think of APs as the intermediaries between investors and the ETF Sponsor.

Unlike mutual funds or hedge funds, ETF Sponsors don’t take cash to invest, nor do they deal directly with investors. ETF Sponsors take a portfolio of stocks instead of cash, and they trade with APs instead of with investors. ETF Sponsors and APs create ETF shares with the “create process”.

The “create process” involves the following steps:

• 1、The Authorized Participant buys stocks and bundles them in the same proportions as defined by the ETF Sponsor.（授权参与者以与ETF赞助商定义的相同比例购买股票并捆绑销售。）
• 2、The AP gives these stocks to the ETF Sponsor.
• 3、The ETF Sponsor creates ETF shares and gives these to the AP.（ETF保荐人创建ETF股票并将其提供给AP。）
• 4、The AP sells the ETF shares to investors.

## Redeeming Shares(兑换股票)

### Redeem Process(兑换过程)

When individual investors wish to divest their holdings in an ETF, they can sell their shares to other investors on the stock exchange, like they would with a stock. This is the same process for investors of closed end mutual funds.

To exchange ETF shares for their underlying stocks, this requires what’s called the “redeem process”, and is a transaction between ETF Sponsor and APs. The redeem process takes ETF shares out of circulation, and puts the underlying stocks back into the market.

The redeem process involves the following steps

• 1、The AP buys ETF shares from investors in the stock market.
• 2、The AP trades these ETF shares with the ETF Sponsor in exchange for the original stocks.
• 3、The AP sells these stocks on the stock exchange.

## Lower Operational Costs and Taxes

### Operational Costs and Taxes(运营成本和税收)

ETF sponsors can charge more competitive (lower) fees in part because their transactions can be more tax efficient. If you think of how individual investors are taxed on their investments, selling a stock at a higher price than when they bought it will be considered a “realized” capital gain.
ETF赞助商可以收取更具竞争力（更低）的费用，部分原因是他们的交易可以提高税收效率。如果你想到个人投资者如何对他们的投资征税，以高于购买价格的价格出售股票将被视为“已实现”的资本收益。

Investors pay taxes on the cash they earn from capital gains. For an ETF Sponsor, recall that when it enters a create or redeem process, stocks and ETF shares are being exchanged, and not cash. Also, the dollar value of these assets being exchanged are more or less equal.

Let’s look at a pretend example. Let’s say an open-end mutual fund is handling investor redemptions, and so the fund sells $10,000 worth of stocks to improve liquidity and handle the redemptions. The fund originally bought those stocks at a value of$9,000, and so realizes a capital gain of $1,000, which is taxed. Let’s also pretend that an ETF sponsor is entering a redeem process with an AP, and gives$10,000 worth of stocks to the AP, in exchange for 10,000 worth of ETF shares. There is no realized capital gain, so there is no tax. ## Arbitrage(套利) Arbitrage is the act of simultaneously buying and selling assets that are interchangeable, in order to profit from pricing differences. 套利是同时买卖可互换资产的行为，以便从定价差异中获利。 Arbitrage plays a role in making markets more efficient, which means that prices are more consistent for the same asset. When investors and funds collectively find and act on arbitrage opportunities, they reduce price discrepancies in the market. 套利在提高市场效率方面发挥着作用，这意味着同一资产的价格更加一致。投资者和基金集体发现套利机会并采取行动时，它们会减少市场中的价格差异。 In general, I like to buy low and selle high. 低买高卖。 ## Arbitrage for Efficient ETF Pricing ### Misaligned ETF prices and Arbitrage Opportunity The market value of an ETF share may diverge from the market value of its underlying portfolio of stocks (its NAV). ETF股票的市场价值可能与其相关股票组合（其净资产值）的市场价值不同。 If an ETF share price is higher than its NAV, we say it’s trading at a premium. 如果ETF股价高于其资产净值，我们称其交易溢价。 If an ETF share price is lower than its NAV, we say it’s trading at a discount. 如果ETF股价低于其资产净值，我们称其以折扣价交易。 The difference between the ETF share price and its NAV can be called its “basis”. ETF股价与其资产净值之间的差异可称为“基础”。 ### Re-align ETF Share Price with Arbitrage(将ETF股价与套利重新调整) An Authorized Participant (AP) looks for when an ETF is trading at a premium or discount to its NAV. The AP then buys low and sells high in order to make a profit on the difference. This trade also reduces the price discrepancy and helps to keep ETF share prices in line with their NAV. For example, if the ETF is trading at a premium the AP will enter a create process with the ETF Sponsor. This means that the AP buys the underlying stocks (at a relatively low price) and exchanges them with the ETF Sponsor for ETF shares (which are priced at a premium). Then the AP sells those ETF shares on the stock exchange. The purchase of underlying stocks tends to push the stock prices up. The creation of more ETF shares tends to push the ETF share price downward. ### 练习题 The “Tomato and Avocado” ETF is market cap weighted and contains only two stocks: Tomato Corp. and Avocado Corp. Tomato is2 per share with 5000 shares outstanding; Avocado is $5 per share with 2000 shares. There are 1000 shares of “Tomato and Avocado” ETF, linked to 2500 shares of Tomato and 1000 shares of Avocado. The price of an ETF share is$9.50 per share. What should the AP do?

A：create
B：redeem
C：neither
D：both

That’s right, the AP wants to redeem ETF shares.

The Authorized Participant notices that the ETF share is priced below the value of its underlying assets, and to take advantage of the price difference, it wants to buy ETF shares, redeem them for the underlying assets, and sell the underlying assets at their respective share prices.

To see this, we first check the fair value of 1000 ETF shares. These ETF shares represent 2500 Tomato shares at $2 each, and 1000 Avocado shares at$5 each. Combined, these are valued at $5000 plus$5000 or $10 000. Next, we check the market value of the 1000 ETFs. These 1000 ETF shares are priced at$9.50 each, and so their market value is \$9.50 times 1000 or 9 500. This is lower than the fair value of its underlying assets.

So the Authorized Participant wants to buy low and sell high. They buy the underpriced ETF shares, redeem them from the ETF Sponsor in exchange for the underlying stocks of Tomato and Avocado, and then sell these stocks to make a profit.