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The recent uptick in the A-share market has attracted many new investors to rush in! However, after opening new accounts, many investors find that their stock accounts can not only buy A-share stocks but also ETFs, which are more convenient, offer more choices, and have stronger operability.

What are the connections and differences between the two? Let's clarify in 3 minutes.

ETFs & Stocks, Many Connections

ETF Definition: The full name is Exchange Traded Fund, which literally translates to "Exchange Traded Open-End Index Fund."

It includes three meanings:

Firstly, Index Fund

In essence, ETFs are funds, and they are funds that track indices.

Based on the strategy of the ETF fund replicating the target index, holding an ETF fund is equivalent to holding a basket of index constituent stocks (*Note: The number of index constituent stocks is generally more than 30).

Therefore, equity ETFs also have the nickname "index stocks," which are a collection of stocks.Secondly, in terms of listing and trading on stock exchanges, ETFs, like stocks, are listed on stock exchanges. During the trading hours of the exchange, ETF funds can be added or reduced at any time in units of 100 (shares), and the process from market quotes to buying and selling, and then to transactions, is very similar to that of stocks.

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Thirdly, ETFs can be exchanged for a basket of stocks. As an open-end fund, ETFs can also be exchanged for a basket of stocks. This is the unique "physical redemption mechanism" of ETFs— it allows for the exchange of a basket of stocks and a small amount of cash for fund shares, and vice versa, fund shares can be exchanged for a basket of stocks and cash. However, for individual investors, the participation threshold is relatively high (starting at nearly a million yuan).

What are the differences between ETFs and stocks?

Different fee structures:

The trading of stocks generally involves commissions, stamp duties, etc.

In contrast, the sale of ETFs does not incur stamp duty; only management fees and custody fees are charged, and these rates are significantly lower than those of typical stock-based funds.Different Investment Thresholds

Many individual investors who are new to the stock market do not have the qualifications to open trading rights for the ChiNext Board, the STAR Market, and overseas markets:

Investing in the ChiNext Board requires more than two years of stock investment experience, an average asset value of 100,000 yuan in the 20 trading days before opening, and passing a risk assessment;

Investing in the STAR Market requires more than two years of stock investment experience, an average asset value of 500,000 yuan in the 20 trading days before opening, and passing a risk assessment.

Those who do not have the qualifications but are afraid of waiting for two years and missing the market trend can solve the investability issue through Exchange Traded Funds (ETFs).

It is worth mentioning that there are many high-priced stocks on the ChiNext Board and the STAR Market, with a single hand of 100 shares often costing tens of thousands of yuan. Therefore, betting on a single stock not only carries a high risk but also occupies a significant amount of capital and position.

However, the capital threshold for ETFs tracking the ChiNext Board and the STAR Market is as low as a few hundred yuan per hand, allowing new investors to participate, which is more efficient in terms of capital utilization.

In addition, cross-border ETFs are also of great interest to A-share investors. For example, the Hang Seng TECH Index ETF (513180.SH) allows investment in Hong Kong stocks through an A-share securities account, without the need to open a separate cross-border account or exchange currency.

Different Investment Objects

There are various types of ETFs, including not only stock ETFs but also cross-border ETFs, commodity ETFs, bond ETFs, and money market ETFs, which can invest in commodity futures, bonds, and even overseas markets.So, ETFs are still an important asset allocation tool for stock investors, and they can use ETFs to build investment portfolios with low correlation between assets.

For example, many stock investors choose to hold CSI 300 ETFs, S&P ETFs, and pair them with gold ETFs or benchmark government bond ETFs to easily complete a diversified asset allocation across varieties and markets.

Different sources of returns

Sources of stock returns

The difference between low buy and high sell in the secondary market, as well as dividend income from management cash dividends

Sources of ETF returns

1) The increase in the net value of the fund, mainly depends on the performance of the tracked benchmark index, with an annual tracking error not exceeding 2%.

2) If the dividend of the constituent stocks of the benchmark index is distributed, it will also contribute to the increase in the net value of the ETF;

3) When ETFs experience premium or discount, arbitrage can also be carried out between the primary and secondary markets to earn price differences (but the operation threshold is high and not suitable for most new investors in the stock market).

There are also some special cases:For instance, the return sources of a Soybean Meal ETF include not only the rise or fall of soybean meal futures prices but also the roll yield brought about by contango.

Different approaches to dividend handling:

Stock Dividends

Generally divided into two types: cash dividends and stock dividends.

In simple terms, a cash dividend is when a company directly pays money to its shareholders; a stock dividend is when a company distributes additional shares to its shareholders, also known as "bonus shares."

ETF Dividends

1) If the ETF's holdings, which are the index constituent stocks, pay dividends, there are two ways to handle them:

The first scenario, to not affect the ETF's tracking error, the fund manager might consider distributing this portion of the dividend directly to the fund holders.

The second scenario, to adjust the ETF's tracking error, the fund manager would prioritize using this portion of the dividend to proportionally purchase the index's constituent stocks, which would then be included in the fund's net asset value.

In summary, both of the aforementioned treatments are beneficial for investors.2) ETF funds also distribute dividends when certain conditions are met:

For instance, the Shanghai Stock Exchange 50 ETF clearly states in its prospectus: "If the cumulative return rate of the fund evaluated on the fund income evaluation day exceeds the cumulative return rate of the benchmark index for the same period by more than 1%, a distribution of income will be made."

This ETF conducted a fund dividend distribution in November 2023, allocating a profit of approximately 956 million yuan, with a dividend plan of 0.39 yuan per 10 fund shares.

Lastly, let us recall Warren Buffett's famous words:

By investing in index funds regularly, an amateur investor who knows nothing can outperform most professional investors!

New investors in the stock market, facing the difficulty of stock selection, need not fear; they can leverage ETFs with good liquidity to achieve diversified investments and portfolio allocation!

Risk warning: Some data are time-sensitive and do not constitute promotional materials for funds or any legal documents. The views expressed in this material do not represent any investment advice or performance commitment. Past performance of the index does not guarantee future performance and does not constitute a guarantee or commitment to the fund's performance. The aforementioned indices, ETFs, and individual stocks are not recommendations. The above views are for reference only; the market has risks, and investment should be made cautiously. The price fluctuation of ETFs in the secondary market does not represent the actual net value change. The market has risks, and investment should be made cautiously. Index performance does not represent product performance, and secondary market price performance does not represent net value performance.

The aforementioned fund has a risk level of R4 (medium to high risk), and the above funds belong to equity funds, with higher risks and returns than hybrid funds, bond funds, and money market funds.

The aforementioned funds are ETF funds, and investors face potential risks such as failure to control tracking error to the agreed target, cessation of services by the index compiler, suspension of constituent securities, deviation of the target index return from the average return of the stock market, risk of target index fluctuations, deviation of the fund's investment portfolio return from the target index return, risk of target index changes, risk of premium and discount on the secondary market transaction price of fund shares, risk of errors in the redemption list, risk of errors in decision-making and calculation of IOPV, delisting risk, risk of investor redemption failure, risk of realization of the redemption consideration of fund shares, and risk of derivative investment, etc. The aforementioned funds that include overseas securities investment mainly invest in financial instruments with good liquidity in the Hong Kong securities market. In addition to bearing general investment risks similar to domestic securities investment funds, such as market volatility risks, the aforementioned funds also face special investment risks associated with overseas securities market investments, such as exchange rate risks, Hong Kong market risks, etc. The Hong Kong stock market implements T+0 turnover transactions and does not set price limits for individual stocks, which may result in more significant stock price fluctuations than A-shares; exchange rate risks (exchange rate fluctuations may cause losses to the fund's investment returns), and risks brought by the discontinuity of trading days under the Hong Kong stock connect mechanism (when the mainland market is open and Hong Kong is closed, Hong Kong stock connect cannot trade normally, and Hong Kong stocks cannot be sold in time, which may bring certain liquidity risks), etc.