Exchange Traded Funds (ETFs)

definition

ETF is a fund that tracks a specific index or asset. It is listed on an exchange, allowing investors to trade it in real time like buying and selling stocks. Its price is usually close to the fund's net value (NAV), and it maintains linkage with the underlying assets through an arbitrage mechanism.

• Common types include index ETFs, industry ETFs, bond ETFs, commodity ETFs, currency ETFs, etc.

Way

The main operating methods of ETFs include:

• Track the underlying index or asset portfolio, such as S&P 500, CSI 300, gold, etc.

• Can be freely bought and sold during trading hours, the same as stock trading

• Primary market subscription and redemption mechanism: Institutional investors can subscribe and redeem in kind or in cash to keep the ETF price close to the net value

• Secondary market trading mechanism: ordinary investors buy and sell ETF shares directly on the exchange

Advantages

• Diversified investment: one transaction can gain exposure to a basket of assets, reducing the risk of a single target

• Flexible trading: real-time buying and selling, pending orders, short selling through securities lending or using leverage tools

• Lower costs: Management fees and subscription and redemption fees are usually lower than traditional mutual funds

• Price transparency: ETF prices and net assets are kept close through arbitrage mechanisms

• Suitable for asset allocation: covering stocks, bonds, commodities, currencies and other markets

Disadvantages

• Tracking error risk: ETF prices may deviate from the underlying index due to liquidity or management factors.

• Liquidity differences: Some unpopular ETFs have low trading volumes and large bid-ask spreads

• Short-term volatility risk: Like stocks, it is affected by market sentiment and has large short-term price fluctuations.

• Leveraged and inverse ETFs are riskier: suitable for short-term trading rather than long-term holding

Case

• S&P 500 Index ETF (SPY): One of the most well-known ETFs in the world, it tracks the performance of the S&P 500 Index and provides convenience for investing in the U.S. stock market.

• Hua Xia CSI 300 ETF (510300): Tracking the CSI 300 Index, it is one of the most active ETFs in the Chinese market.

• Gold ETF (GLD): allows investors to directly gain exposure to gold prices through ETFs without having to physically hold gold.

• Bitcoin ETF

• Since the first batch of physical Bitcoin ETFs were listed in January 2024, they have been popular among investors. Represented by iShares Bitcoin Trust (IBIT), Bitwise Bitcoin ETF, and Grayscale Bitcoin Mini Trust (BTC), as of mid-2025, the price of Bitcoin exceeded $120,000, attracting more than $40 billion in capital inflows .

• In February 2025, Bitcoin pulled back due to capital outflow and policy factors. ETF became one of the tools for adjusting positions, accelerating price fluctuations .

• Ethereum ETF

• Since the SEC approved the listing of the first batch of physical Ethereum ETFs in July 2024, such as Grayscale, Fidelity, VanEck, ARK 21Shares, Franklin, etc., ordinary investors are allowed to directly configure ETH through brokerage accounts .

• After listing, the price of ETH rebounded by 23%, and related Ethereum logic stocks were also pulled up; in July 2025, the price returned to a 6-month high (over $3,600), and the Ethereum ETF net value tracking performance was significant .

Summarize

ETF is an investment tool that combines the advantages of fund diversification with the convenience of stock trading. It is suitable for individual investors to make low-cost index investments and is also convenient for institutions to conduct asset allocation and risk management. Its core value lies in simplicity, efficiency, transparency and low fees, but investors still need to pay attention to potential risks such as the characteristics of the underlying assets, liquidity and tracking errors.