The proposed merger between Hygon Information Technology and Inspur Electronic Information Industry has triggered massive inflows into China’s information innovation-themed ETFs, with several funds recording historic trading volumes on June 5. As arbitrage-seeking capital floods the market, multiple asset managers have issued urgent risk warnings to investors.
Record Trading Volumes for Tech ETFs
Guotai Fund’s information innovation ETF saw trading volume hit 764 million yuan on June 5, setting a new record. Huabao Fund’s equivalent product recorded 238 million yuan in turnover, doubling its previous day’s volume. Similar records were broken by similar ETFs managed by Fullgoal Fund and China Universal Asset Management.
The trading frenzy follows Hygon’s May 26 announcement of its plan to absorb Inspur through a share swap arrangement, with both companies suspending trading pending the deal’s completion. Analysis shows these two stocks constitute significant components in various information innovation ETFs, attracting arbitrage capital seeking to profit from anticipated price movements post-reopening.
According to Choice data, seven major information innovation ETFs attracted combined net inflows of 3.088 billion yuan between May 26 and June 4, with ChinaAMC and Guotai products leading at 1.214 billion and 836 million yuan respectively. The pace accelerated dramatically this week, with 1.838 billion yuan flowing in during just two trading days.
The capital surge has dramatically expanded fund sizes – ChinaAMC’s ETF grew from 440 million to 1.651 billion yuan, Guotai’s from 124 million to 925 million yuan, and Fullgoal’s from 58 million to 480 million yuan during this period.
Industry Experts Sound Caution
“While ETFs provide exposure to basket of stocks, successful arbitrage is far from guaranteed,” cautioned a fund researcher. “These ETFs contain multiple components beyond the suspended stocks, and the eventual post-reopening price movements remain highly uncertain.”
On June 5, Fullgoal, GF Fund and Guotai issued coordinated warnings about potential tracking errors and deviations caused by their inability to adjust portfolios containing suspended stocks. The notices urged investors to carefully evaluate risks before trading.
ChinaAMC explained the technical challenges of ETF arbitrage: “For stocks marked as ‘must cash substitute’ in redemption lists, investors receive cash rather than the actual shares, making traditional arbitrage strategies impossible.” Most information innovation ETFs currently classify both Hygon and Inspur shares under this restrictive category.
The firm further warned about premium risks, noting that inflated prices may already reflect arbitrage expectations and could normalize abruptly. Minimum redemption units of 1 million shares also create high barriers for retail investors attempting such strategies.
Active Funds Implement Restrictions
Beyond ETFs, some actively managed funds have imposed purchase limits. Harvest Fund’s Information Industry Stock Fund, which held over 18% of its portfolio in the two suspended stocks as of Q1, introduced a 10,000 yuan daily purchase cap starting May 27 to prevent disruptive inflows.
Market analysts caution that while merger-related opportunities attract attention, the actual arbitrage success depends on multiple unpredictable factors, making these trades far from the “sure bets” some investors might perceive.
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