The Shanghai and Shenzhen stock exchanges recently released a draft for public comment, outlining plans to delist certain LOF products, including commodity futures LOFs, QDII-LOFs, and small-scale LOFs, which have been listed for 22 years. Although the proposal is still in the consultation phase, several fund companies have already begun proactive preparations, with some terminating market-making agreements for their LOF products to pave the way for future delisting.

One fund company representative stated, "Some of our LOF products are affected by this regulatory adjustment. We are currently providing feedback on the draft and will implement the requirements once the final version is released." LOFs were originally created as a transitional product from the restructuring of分级基金, and as ETFs grow and active ETFs prepare for listing, LOFs are approaching the end of their historical role.

Overview of the Delisting Plan

According to the draft, the delisting will primarily target two categories of LOFs. First, commodity futures LOFs and QDII-LOFs will have a longer transition period, with a requirement to terminate their listing by December 31, 2027, at the latest. Second, small-scale LOFs will have no transition period; they must initiate delisting procedures if the net asset value of their on-exchange shares remains below 10 million yuan for 60 consecutive trading days after the new rules take effect. As of the end of June 2026, there were 402 LOFs on the Shanghai and Shenzhen exchanges, with a total on-exchange and off-exchange scale of 649.8 billion yuan, of which on-exchange scale was about 59.4 billion yuan. The proposed delisting affects approximately 125 products, with a total on-exchange scale of about 26 billion yuan. Among these, 91 small-scale LOFs have an on-exchange scale of only about 300 million yuan, so the impact is relatively concentrated.

Fund Companies Act First, Preparing for QDII-LOF Delisting

On August 14, Hwabao WP Fund Management Co., Ltd. announced that it would terminate its liquidity service agreement with Zheshang Securities Co., Ltd. for the Hwabao WP Oil & Gas LOF. This LOF currently has a total scale of 2.007 billion yuan, with an on-exchange market value of 1.1 billion yuan. Analysts suggest that proactively ending the market-making partnership is a preliminary step toward preparing for the QDII-LOF's future delisting. Several fund companies confirmed to reporters that they will gradually push for on-exchange delisting of their affected LOF products, guiding holders to transfer their shares to off-exchange fund shares through custodial transfers. "As managers, we are also troubled by the on-exchange premium and discount issues with LOFs. A unified delisting in the future will help reduce operational risks and customer complaint pressure at the source," a fund company representative from South China said.

Many LOFs Still Show Significant On-Exchange Premiums

The core reason for delisting LOFs is the long-standing risk of on-exchange premiums that are difficult to eliminate. On one hand, commodity futures LOFs and QDII-LOFs may face restrictions on subscription limits due to factors like futures exchange position limits or insufficient QDII foreign exchange quotas, which can easily lead to high on-exchange premiums. For example, the silver LOF once caused a major controversy due to its high premium. On the other hand, small-scale LOFs suffer from poor liquidity, leading to volatile price fluctuations and making them easy targets for short-term speculation. Investors who buy at a high premium risk direct losses if the premium later declines. Even closed-end LOFs carry premium risks. For instance, the Caitong Fuxin LOF has been repeatedly flagged by the Shanghai Stock Exchange as a key monitoring target. Since this LOF is a fixed-open product currently in a closed period, it is not accepting subscription or redemption applications. This has driven many investors into the secondary market, causing the trading price to severely exceed the fund's net asset value, resulting in an extremely high premium. Despite multiple risk warnings and trading halts issued by the fund company, the premium level has remained difficult to reduce. As of the close on August 14, the global chip LOF had a premium of 21.29%, while the S&P Information Technology LOF, Guotou Silver LOF, and Nasdaq 100 LOF all had premiums exceeding 3%.

Lively Discussion During the Feedback Period

After the draft was released, market feedback has been intense, especially from professional investors who have long been involved in LOF arbitrage. They argue that the high premiums on QDII-LOFs primarily stem from insufficient foreign exchange quotas, not the product structure itself. They suggest that if delisting proceeds, on-exchange investment demand will not disappear but could shift to QDII-ETFs, potentially worsening their premium issues. Consequently, some investors propose converting relevant LOFs into ETFs to preserve product supply and smooth out premium fluctuations. This suggestion has also gained some resonance within the industry, especially as active ETFs are about to be launched, leading to more frequent discussions about LOF conversions. However, an index fund manager from South China stated bluntly that LOFs are unnecessary, whether as passive or active products. "ETFs, with their in-kind creation and redemption, low fees, and real-time arbitrage efficiency, have established a dominant advantage in index investing." In the active investment space, however, LOFs still offer convenience for investors accustomed to on-exchange trading, such as cash subscription and redemption and dual on-exchange/off-exchange channels, which are functions current ETFs do not possess. Yet, as active ETFs become more widespread, their advantages in transparency, cost, and arbitrage efficiency will further compress the survival space of active LOFs. "Even if some active LOFs could potentially be converted into active ETFs in the future, large-scale conversion may not be necessary when considering operational costs and complexity," the manager added. A fund company representative from Shanghai noted that on-exchange delisting does not mean the product is disappearing. For non-arbitrage investors, delisting merely changes the trading channel, as their holdings can be smoothly transferred to off-exchange funds through custodial transfers, with fund net asset value and investment operations unaffected. For fund companies, delisting helps reduce operational burdens and avoid compliance and reputation risks caused by premiums and discounts.