ETF vs. LOF - Connections and Differences

2023-10-30
Summary:

ETFs, listed on exchanges, offer high liquidity and convenient trading. LOFs feature flexible subscriptions and redemptions.

ETF, or exchange-traded fund, is a common type of fund, while LOF, or listed open-end fund, is somewhat similar to it. They play an important role in the investment market, each with its own unique characteristics and advantages. This article will delve into the connection and difference between ETF funds and LOF funds to help investors better understand their characteristics and applicable scenarios.

ETF vs. LOF

What is an ETF?

The full name of an ETF is "Exchange Traded Fund". The name is already quite straightforward, and the meaning can be understood literally. The most important feature of ETFs is that they can be traded freely with other investors on exchanges, unlike most open-ended funds. Under normal circumstances, open-end funds can only be purchased or redeemed through fund companies but cannot be freely traded in the secondary market. But ETFs can be bought and sold on exchanges like stocks, making investing easier.


Etfs are not limited to tracking Index Funds; they can also be active funds. In the domestic and international markets, most ETFs are index funds, and as such, ETFs are generally considered to be tradable index funds.


Etfs can only be traded or redeemed on exchanges, and investors who want to invest in ETFs first need to open a stock account with a Securities company. However, in order to satisfy investors who do not have brokerage accounts, many ETF funds have a corresponding over-the-counter linked fund. These connected funds, which can be subscribed to and redeemed through banks and online marketing platforms, typically invest in the same underlying assets as ETFs, namely the fund's stock holdings.


Etfs and ETF-linked funds are consistent in terms of management fees, which typically include management fees and custodian fees. The difference is that ETFs need to pay a certain transaction fee when trading, which is usually around 0.15%, and some brokerages can even reduce it to 0.1%. The purchase and redemption costs of ETF-linked funds are specified by the company and need to be checked in detail.


There are also differences in subscription and redemption fees between Class A and Class C of the same fund. The price of an ETF changes in real time, and the transaction price is determined by the market price at that time, while the price of an ETF-linked fund is based on the final net value after the close of trading every day.


What is an LOF fund?

The full name of LOF is "Listed Open-End Fund", that is, listed open-end fund. A LOF fund is an open fund with unique characteristics of subscription and redemption. Unlike ETFs, LOF funds can be subscribed to and redeemed on the exchange as well as over-the-counter. In addition, the LOF fund also supports the conversion of shares between the field and the field, which is a flexible feature.


Different from ETF funds, domestic LOF funds have both index funds and active funds, and investors can choose different types of LOF funds that suit their needs, including index tracking and active management.


The link between ETF and LOF funds

  1. Fund structure

    Both ETFs and LOFs have an open-end fund structure, which means they can constantly issue new shares as investors demand them. Investors can buy shares of these funds according to their own investment objectives and needs.

  2. Portfolio diversity

    Etfs and LOFs are pooled funds that pool investors' money to buy many different types of assets, such as stocks, bonds, commodities, and more. This gives investors access to portfolio diversity and reduces risk.

  3. Open trade

    Investors can buy and sell open-end on exchange-listed ETFs and LOF funds, which means they can be bought and sold in the market like stocks without being subject to the redemption period of the fund company.

  4. Net asset value (NAV)

    Both ETFs and LOFs regularly publish the net asset value (NAV) of their funds, and investors can use the NAV to understand the net value of the fund and make decisions.

  5. Professional management

    Both ETFs and LOF funds are managed by professional fund managers who are responsible for the portfolio management and operation of the funds.


The difference between ETF funds and LOF funds

  1. Transaction method

    Etfs can be listed and traded on a stock exchange, just like stocks. Investors can buy and sell on the exchange through market orders or limit orders, and the trading hours are consistent with the securities market. LOF funds are not listed on an exchange but are bought and redeemed through fund management companies, with investors required to make subscription and redemption requests to the fund company, and the price is usually based on the net value of the day.

  2. Price determination method

    The price of an ETF is determined by market supply and demand, that is, market price trading, so its price may have a certain premium or discount to the net value of the fund. The price of the LOF is usually equal to the net value of the fund because its subscription and redemption prices are determined based on the net value of the fund on the day, and there is no premium or discount.

  3. The subscription mechanism is different

    One significant difference is that ETFs use physical subscription and redemption, requiring the exchange of a basket of shares to acquire or redeem ETF shares. The LOF fund uses cash subscriptions and redemptions and directly purchases or redeems shares with cash. This has led to a relatively high threshold for ETF funds to purchase on the floor, which usually requires hundreds of thousands of starts and is more suitable for institutional investors. The LOF fund has a low purchase threshold, which is suitable for ordinary investors.

  4. Different places of redemption

    LOF funds support both on- and off-market purchase and redemption, while ETF funds can only be bought and sold in the on-market and need to use the corresponding off-market linked funds for purchase and redemption. If an ETF does not have a corresponding over-the-counter linked fund, investors will not be able to invest in the ETF over the counter.

  5. Different fund types

    Although ETFs can also be active funds, for the most part, they are index funds. In contrast, LOF funds include both index and active funds, offering more options.

ETF vs. LOF
Feature/Difference ETF Fund LOF Fund
Full Name Exchange Traded Fund Listed Open-End Fund
Exchange Trading Traded on exchanges, similar to stocks Can be traded on exchanges and bought or redeemed off-exchange
Price Determination Market price trading, may have premiums or discounts Typically equal to the net asset value, with no premiums or discounts
Purchase Mechanism In-kind creation and redemption (exchange of a basket of stocks) Cash purchase and redemption
Purchase/Redemption Location Only on exchanges, requires off-exchange affiliated fund Can be purchased and redeemed both on and off-exchange without the need for an affiliated fund
Fund Types Can be index or actively managed fund Includes index and actively managed funds

Both ETF funds and LOF funds are tools for investors to diversify their asset allocation. After understanding the connection and difference between ETF funds and LOF funds, investors should make wise decisions according to their investment objectives, risk appetite, and needs when choosing ETF or LOF funds. Understanding their characteristics and differences is an important step in making investment decisions to better plan and manage a portfolio.


Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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