Exchange-Traded Funds (ETFs) combine the advantages of both open-end and closed-end funds. Investors can subscribe to or redeem ETF shares through the fund company (primary market), and can also buy or sell them on the secondary market at market prices like closed-end funds. Due to differences in trading mechanisms between the two markets, a price gap may occur between the Net Asset Value (NAV) of ETF shares in the primary market and their trading price in the secondary market, creating arbitrage opportunities.

Instant Arbitrage

There are two main types of basic ETF arbitrage. The first is discount arbitrage: when the ETF's secondary market price is lower than its NAV, investors can buy the ETF on the secondary market and redeem it in the primary market for the basket of underlying stocks, then sell the stocks to obtain cash. The second is premium arbitrage, which is the opposite: when the ETF price is higher than its NAV, investors can buy the basket of stocks, subscribe to ETF shares in the primary market, and sell them on the secondary market to earn a profit. These two are the most common ETF arbitrage methods—called instant arbitrage.

Note: Since ETF subscriptions/redemptions have minimum size requirements (e.g., 1 million units), instant arbitrage is not suitable for small or medium-sized investors.

Delayed Arbitrage
As an extension of instant arbitrage, ETF arbitrage can also take the form of delayed arbitrage, where the investor does not synchronize the buying and selling of ETFs and the basket of stocks. The full trade cycle takes longer, resembling T+0 trading.

By taking advantage of ETF trading rules, investors can subscribe to or buy ETFs at a relatively low point and sell or redeem them at a relatively high point. Compared with instant arbitrage, this strategy relies more on short-term index movements and carries higher risk. In practice, to ensure stable returns and reduce risk, traders usually complete the full cycle within the same day.