This year has undoubtedly been a phenomenal one for Exchange Traded Funds (ETFs).

The rapid rise of ETFs as a key battleground for both institutional and retail investors can be attributed to their convenience for on-market tradingThey have become the preferred avenue for investors looking to navigate the challenges faced by long-term assets like insurance funds and social security funds entering the marketIn essence, ETFs have entered their most prosperous phase to date.

According to statistics from Wind, as of the latest closing date, the number of ETF shares has surged to 6,089.37 billion, marking a year-on-year increase of 30.18%. The total market size has reached 38,161.39 billion, a striking gain of 86.04%. Meanwhile, the average daily trading volume has ballooned to 2,363.90 billion, demonstrating a 74.02% year-on-year growthAdditionally, 142 new ETF funds have been launched, bringing the total number of ETFs to 1,024.

But is investing in ETFs truly as hassle-free as it appears?

What are the profits generated by ETF funds?

It is essential to clarify that the ETFs currently launched in the domestic market primarily refer to ETF index funds, which represent ownership of a basket of stocksWhen investors buy or sell an ETF, it is essentially equivalent to trading the underlying index, offering returns that closely mirror that of the respective index.

There are nearly 800 equity ETFs in the entire market, adequately covering various scales, industries, themes, styles, and strategies

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For instance, there are 26 ETFs closely linked to the well-known CSI 300 Index.

Given that they all track the same index, should investors simply engage in "blind buying" of these funds?

In reality, it is evident that even among ETFs tracking the same index, the performance varies significantlyAttention should be paid to the following points.

Liquidity: The Lifeblood of ETF Products

The net asset value (NAV) of ETFs is updated every 15 seconds, making liquidity crucial for maintaining ease of trading in the marketTypically, ETFs with higher trading volumes tend to exhibit better liquidity, which translates to more stable trading prices and easier transactionsBy contrast, ETFs with poor liquidity can present significant challenges: long waiting times for trades and the potential for experiencing difficulties in finding "counterparties," leading to missed opportunities for favorable transactionsFurthermore, poorly liquid ETFs often feature unbalanced order prices, resulting in hindrances when placing ordersFor instance, if an investor aims to purchase a product at a price of 1.055 but neither finds a seller at that price nor can reasonably approach it, the nearest available price may be 1.068, creating a considerable deviation from their initial expectation.

To assess the liquidity of an ETF, the average daily trading volume is a vital metricFor example, analyzing the trading volume of large-scale ETFs reveals astounding discrepancies, with some exceeding 5 billion in transactions daily while others struggle to reach a mere 1 millionNotably, comparing the performance of the CSI 500 Index ETFs — such as the CSI 500 ETF (510500) versus the Guolian CSI 500 ETF (515550) and the Industrial Bank CSI 500 ETF (510570) — shows a stark contrast in their trading activities.

The reasons behind these performance disparities are multifaceted: First, as ETFs can both be subscribed to or redeemed on the primary market and traded on the secondary market, price inconsistencies may arise, leading to phenomena such as ETFs trading at a premium or discount, impacting trading volume

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Second, newly established funds take time to build positions in the index components, consequently affecting trading activityThird, funds must maintain a certain proportion of cash for redemption needs in day-to-day operations, and various cash management strategies may influence the fund's NAV performance.

Undoubtedly, while ETFs serve as time-efficient investment tools, the proficiency of the fund management team and the competence of the portfolio managers demand careful scrutinyInvestors should prioritize selecting ETFs backed by reputable companies, preferably those established for over a year and with substantial fund size.

Excess Returns: Can Performance Surpass the Index?

The investment objective of ETF products is to replicate the index’s growth as closely as possible while minimizing deviations in their NAV from the index performancePrimarily rooted in passive investment strategy principles, ETFs largely share the overall beta returnsHowever, in recent years, there has been a surge in popularity of enhanced ETFs, which aim not only to track the index efficiently but also to actively manage index combinations and risks using quantitative methods to surpass the target index’s investment returnsThe crux of fund performance hinges on the effectiveness of the quantitative models employed and the managerial aptitude of the fund managers.

A detailed examination of actual performance reviews reveals that fund managers’ abilities and the quality of enhanced strategies significantly impact investment outcomes.

Admittedly, enhanced ETFs that disclose fund manager holdings to the market could face the risk of being front-run or copied, resulting in strategy failures

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