The year 2024 has established itself as a standout era for broad-based exchange-traded funds (ETFs) in ChinaThe recently launched CSI A500 ETF has surged in popularity, surpassing the Shanghai Stock Exchange's SSE 50 ETF in total scale and claiming the title of the third-largest broad-based index in the A-share market.
Despite the rapid ascent of the CSI A500 ETF, a look back in history reveals that the SSE 50 ETF and the CSI 300 ETF hold paramount importance in the narrative of broad-based ETF development in ChinaThe introduction of the CSI 300 ETF, in particular, has had a lasting impact on the market.
Broad-based ETFs like the CSI 300, CSI 500, and CSI A500 track mainstream indices and are distinct from thematic ETFs that follow industry-specific or stylistic indices, such as non-bank or dividend-focused themes.
The rise of broad-based ETFs marks a significant development, indicating a growing influence of passive investment strategies.
/01 A Mainstream Investment Tool /
The launch of the CSI A500 ETF serves as a notable milestone in the increased penetration of passive investment strategies.
An analysis of the investor composition for the CSI A500 ETF reveals a dominant representation of individual investorsData from the day of its debut indicates that among the 14 listed or soon-to-be-listed CSI A500 ETFs, personal investors held an average of 73.5% of the total assets, while institutional holders accounted for 26.5%.
While investment from insurance companies and state-owned enterprises has emerged, it is clear that the primary force behind the CSI A500 ETF consists of individual investors, unlike flagship ETFs in the market which are predominantly institutionally held.
According to educational resources on the Shanghai Stock Exchange’s website, ETFs are positioned as critical tools for asset allocation, providing four primary benefits: they are labor-efficient, worry-free, cost-effective, and time-saving
Advertisements
The aspect of labor efficiency refers to relieving investors from the daunting task of stock selectionWith over 5000 stocks on the A-share market, constructing a stable investment portfolio through broad-based ETFs mitigates the risks associated with putting all investments into a single stock.
Moreover, the increasing interest in ETFs signifies that investors are placing greater emphasis on market betaETFs are precise instruments designed to track indices passively, with daily disclosures on portfolio holdings that enhance transparency and minimize operational risks associated with human management.
In addition, management fees for ETFs are typically one-third of traditional open-end funds, and the exemption of a 0.05% stamp duty further underlines their cost-effectivenessTheir capacity for funds to be available for use on the same day they are sold, with withdrawals possible the following day, epitomizes their convenience.
From the perspective of individual investors, the threshold for entering the ETF market is significantly lower than that for stocksMost ETFs on the market are priced at around 1 yuan, allowing investors to participate in their targeted sectors with as little as 100 yuan, hence diminishing the uncertainty associated with single-stock investments.
ETFs also lower the barriers for individual investors looking to participate in specific markets such as the Hong Kong Stock Connect, ChiNext, and STAR MarketHowever, potential investors should align these opportunities against their risk toleranceThus, broad-based ETFs remain the optimal choice for ordinary retail investors.
/02 Rapid Growth in Scale /
It is widely acknowledged that the growth of actively managed equity funds is highly sensitive to shifts in market conditions
Advertisements
In contrast, the growth trajectory of mainstream broad-based ETFs has been notably steadier in recent years.
The rapid expansion of broad-based ETFs is not solely attributed to their inherent advantages of being labor-efficient, cost-effective, and time-savingTheir strong market representativity makes them an accessible tool for extensive investor participation.
Additionally, the introduction of stock index futures has allowed various trading strategies such as hedging and arbitrage to pair effectively with broad-based ETFs, further enhancing their trading activity and liquidity.
With multiple factors propelling their growth, broad-based ETFs have consistently produced several funds that command scales exceeding 100 billion yuan.
In the realm of ETFs, the principle of "the strong get stronger" remains prevalentThe differentiation among ETFs tracking the same indices mainly hinges on liquidityHence, larger ETFs are more likely to draw in investorsCurrently, most major ETF managers tend to offer larger scale products, which are predominantly broad-based ETFs.
As fees for mainstream broad-based ETFs have decreased, the entry barrier for ETF management has increased further.
/03 Future Is Not Final /
As a relatively new financial instrument, having only completed 20 years in China, ETFs have substantial growth potential ahead.
In comparison to overseas developments, by the end of 2023, the United States remains the largest ETF market globally, with 3,108 funds and a total net asset value of $8.1 trillion, representing 72% of the global ETF net assets totaling $11.3 trillion
Advertisements
In the US, the total net assets of ETF products account for 24% of the total size of the asset management industry, primarily dominated by large-cap stock ETFs, which accounted for $2.7 trillion of net assets, comprising 33% of ETF net assets.
Against the backdrop of the recent collective launch of the CSI A500 index ETFs, the current total scale of ETFs in China's A-share market has reached an impressive 3.56 trillion yuanAccording to a report by Guotou Securities, passive investment is on an irreversible upward trajectory, a significant trend that will profoundly reshape the foundational investment philosophies in the A-share market and serve as a major narrative concerning capital trades for a considerable period.
The narrative of passive investment overtaking active equity strategies once played out in the United StatesBetween 2014 and 2023, passive funds attracted $2.5 trillion, while active funds suffered a net outflow of $2.6 trillionThe shift in the scale of passive funds surpassing active funds in the American markets happened in 2021.
From being viewed as mere "tools" to becoming "essentials," the value proposition of ETFs is subtly transformingPreviously, it was a common perception that ETF investments exhibited "high sell low buy" characteristics, primarily providing market support at downturnsHowever, during this recent phase of rapid index ascendancy, considerable ETF funds flowed into the market significantlyFrom September 24 to October 25, equity ETFs experienced a net inflow of 177.2 billion yuan, while on October 8, the total scale of equity ETFs crossed the 3 trillion yuan mark, increasing their proportion in the free-float market capitalization to over 8%.
Guotou Securities posits that the heightened activity in passive index trading reflects both the speed of this current trend and the investor's preference for a beta-focused packaged buying approach, especially as many stocks were undervalued at the start of the rally
Advertisements
Advertisements