A Step-by-Step Guide to QDII Off-Exchange to On-Exchange Arbitrage

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Recently everyone seems to have heard about the high premium of on-exchange QDII funds. Premium means that the market price of an on-exchange fund is higher than the NAV of the off-exchange fund. Crazy examples include US 50 ETF (SH513850), which once reached a 30+ point premium, and Nikkei ETF (SH513520), which reached 20+ points. Ordinary ones also had two points. Fund companies and brokers all issued statements warning about the risk of excessive premiums. High premiums attract arbitrage capital, which then smooths out the premium. Arbitrage here means subscribing to the fund off-exchange, transferring it on-exchange, and then selling it. If the fund neither rises nor falls, one can at least earn the premium. Under normal circumstances, because of the market’s own adjustment mechanism, normal funds with large scale and high trading volume, such as many CSI 300 ETFs (SH510300), have almost no premium. But QDII funds, because of foreign-exchange limits and other constraints, often have purchase limits, small scale, and low trading volume. Arbitrage capital cannot freely and infinitely operate, so premiums form very easily.

In previous years I happened to buy some off-exchange QDII funds (S&P 500 ETF SH513500, Nasdaq 100 SH513100, and China Internet ETF). Previously I bought and sold them directly off-exchange and never thought about transferring them on-exchange for trading. Although the arbitrage threshold is not that high, it is still not low for beginners, and the operation is much harder than ordinary fund purchases. The recent high premiums aroused my great interest, and I searched quite a lot of information and tutorials online. It was not as easy as imagined, and there were not as many resources as imagined. Therefore I summarize it here for future reference. I use my off-exchange “E Fund e-Wallet” and on-exchange “Huatai Securities ZhangLe Fortune” as examples. Other off-exchange fund platforms and on-exchange brokers are broadly similar. I previously sold so many QDII funds directly off-exchange. What a loss.

  1. Query the fund TA account. On the “E Fund e-Wallet” homepage, go to “Me” -> “Account Settings” -> the third item from the bottom, “Fund Account.” Shenzhen accounts are 12 digits starting with 98, and Shanghai accounts are 12 digits starting with 99.

  2. Establish the connection between the off-exchange and on-exchange accounts. In “ZhangLe Fortune,” tap the bottom “Account” button, then at the bottom choose “More Functions,” and search for “On/Off-Exchange Correspondence Maintenance.” Processing time is trading days Beijing time 9:15-15:45. Connect your own account.

  3. Ask the securities branch for the exchange seat number: six digits for Shenzhen and five digits for Shanghai. In the broker app you can get the contact information of your branch and account manager. My account manager added me on WeChat when I opened the account, so I asked directly on WeChat. The reply was quick.

  4. Transfer custody on the fund account. You must log in to the official website; the mobile app does not work. Click “Details - Transfer Custody” after the fund shares you hold. The number of shares must be an integer. It takes two working days to arrive in the broker account. “ZhangLe Fortune” also has a “Fund Off-Exchange to On-Exchange” service, available on trading days Beijing time 9:30-15:00, but it could not find my fund shares. My understanding is that only funds bought off-exchange through the broker account can be transferred there. Funds bought through the fund company or third parties such as Alipay, banks, Danjuan, or Xueqiu cannot be transferred there; they must be transferred out from the corresponding platform.

  5. After arriving on-exchange, the shares can be sold directly on the secondary stock market. Compared with selling off-exchange, this earns the premium.