The Era Chronicles of the RMB 3.6 Trillion ETF Market

 

China's capital market is swiftly entering the era of ETF investment.

Wind data indicates that as of November 26th, the net asset value of ETFs has grown to approximately 3.6 trillion yuan, a 74% increase within the year.

With the explosive growth of ETFs in recent years, the investment ecosystem has changed.

How do institutions find a way out in the path of ETF layout amidst homogeneous competition? How will the future competition pattern of ETFs unfold?

 

ETF Explosion

The development of the domestic ETF market has spanned 20 years.

From the establishment of the first ETF in 2004 to the ETF scale breaking through one trillion yuan in 2020, it took the domestic ETF market 17 years. Then, in just three years, by the end of 2023, the domestic ETF scale reached two trillion yuan, specifically 2.05 trillion yuan.

However, in 2024, the ETF scale surged again, crossing the three trillion yuan mark in just nine months. By the end of the third quarter of 2024, the net asset value of the ETF market accounted for 11% of the total net asset value of all public funds.

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The latest data from Wind shows that as of November 26th, the number of ETFs has increased to 1023, and the net asset value has also grown to approximately 3.6 trillion yuan. Compared to 2.05 trillion yuan at the end of 2023, it has increased by more than 1.5 trillion yuan, a 74% increase.

Structurally, China's ETF market is mainly composed of equity products, accounting for nearly 80% of the total ETF net asset value. Equity ETFs grew from 1.45 trillion yuan at the end of 2023 to 2.77 trillion yuan by the end of the third quarter of 2024, an increase of nearly 90%, which has to some extent surpassed active equity products.

At the same time, equity ETFs are blooming in all areas, from broad-based ETFs to thematic ETFs, industry ETFs, strategy ETFs, and cross-border ETFs, all types of ETFs are growing. Among them, broad-based stock ETFs lead the market expansion with continuous inflows of funds for three consecutive years, and institutional funds continue to increase their holdings. Data from Huatai Securities shows that by the end of the third quarter of 2024, the net asset value of scale index ETFs has increased by 1.2 trillion yuan from the beginning of the year, a rise of nearly 145%.

From the perspective of investors, holding one hand the broad-based ETFs such as the CSI 300 and A-series, and the other hand thematic ETFs such as securities, technology, chips, and dividends, has become the norm for A-share investors.

Regarding the significant surge in ETF scale in 2024, the industry believes there are several driving factors: on one hand, at the policy level, at the end of 2023, the social security fund's investment scope explicitly included ETFs. In the first half of 2024, the new "Nine National Articles" pointed out the need to establish a fast-track approval channel for ETFs to promote the development of index-based investment. Subsequently, since the "9·24 policy," a series of stimulus policies have been compressedly issued, leading to a rapid market rebound. On the other hand, the basic systems of China's capital market are becoming more and more perfect, and the effectiveness of the A-share market is gradually increasing, which is also conducive to the development of index funds. At the same time, ETF products have the advantages of transparent strategies, convenient trading, and low fees, and more and more investors prefer to use ETFs to lay out the A-share market.

Furthermore, Wang Yi, a researcher at Golden Camp Investment under Ge Shang Financial Management, believes that the regulatory level is also a major force in the recent significant development of ETFs.

He introduced that the regulatory guidance on ETFs is mainly reflected in optimizing disclosure rules, promoting the development of index-based investment, encouraging medium and long-term funds to enter the market, and improving the ETF market ecosystem. On one hand, the regulatory level has optimized the disclosure requirements for ETFs to improve market transparency and fairness. For example, for situations where ETF holdings reach the reporting threshold, the regulatory authorities are studying the optimization or exemption of relevant regulations.

 

Strategic Differences of Top Players

Major public funds have also followed the trend of significant ETF development, relying on active product layout and investor education, making ETFs gradually become the main investment tool for investors.

Wind data shows that there are currently 54 fund companies issuing ETFs, with a total ETF scale of about 3.6 trillion yuan by the end of the third quarter.

The competition pattern of the ETF industry is relatively stable, with a clear head effect. Wind data shows that as of the end of the third quarter of 2024, the ranking of fund companies with the highest net asset value of ETF products has not changed much and has generally remained stable.

Wind data shows that as of the end of the third quarter of 2024, there are 12 fund companies with ETF scales exceeding 100 billion yuan, forming the top ETF institutions.

Among them, China AMC ranks first with 664.004 billion yuan, followed by E Fund with 597.674 billion yuan, and Huatai PB with 461.964 billion yuan, accounting for 19.4%, 17.1%, and 13.7% of the ETF market, respectively. The total of the three is about 50%, and it has further increased from 42% at the beginning of the year.

In addition, the ETF management scale of Southern and Harvest exceeds 200 billion yuan, and the ETF scale of Huabao, Guotai, Guangfa, Bosera, Fullgoal, Huaan, and Yinhua Fund companies exceeds 100 billion yuan.

By the end of the third quarter, the cumulative ETF scale of the above 12 top ETF fund companies reached 3.07 trillion yuan, accounting for 87% of the total ETF scale of about 3.6 trillion yuan in the entire market.

The cumulative management scale of ETFs of the top 5 fund companies accounts for 62% of the total market scale. The most concerned equity ETFs currently have a total market scale of about 2.77 trillion yuan, and the cumulative management scale of the top 5 fund companies reaches 1.99 trillion yuan, with an even higher proportion of 72%.

The head effect of ETFs is prominent, and this gap is still widening.

As of the end of the third quarter of 2024, the equity ETF scale of E Fund, Huatai PB, and Southern Fund has doubled within the year.

However, according to the reporter of 21st Century Economic Report, in the ETF market, the "play" of fund companies is different: some are comprehensively attacking, some are focusing on asset allocation, some are emphasizing balanced layout, some are vigorously developing broad-based ETFs, some are focusing on industry-themed ETFs, and some are focusing on cross-border ETFs.

For example, E Fund focuses on the balanced development of ETFs; Huatai PB leads with the CSI 300 ETF; the scale of money ETFs of Huabao Fund and Yinhua Fund is relatively high; the scale of bond ETFs of Bosera Fund and Fullgoal Fund is larger; and the performance of commodity ETFs of Huaan Fund is prominent.

Regarding the development of ETFs, several top fund companies have their strategies.

E Fund stated that the focus of E Fund's ETF business development in the future will first be guided by serving the real economy and strengthening product innovation layout. Secondly, improve the solution system and enhance the investor allocation experience. Thirdly, strengthen investor companionship and services, and explore innovative business models. Finally, promote the domestic ETF market to form a more perfect and healthier ecosystem.

Bosera Fund's layout of ETF products is relatively comprehensive, mainly starting from the perspective of considering asset allocation, because ETFs provide the underlying assets for asset allocation, with distinct risk-return characteristics. Bosera Fund aims to provide a rich variety of ETF product types to provide investors with a rich range of investment targets, to better achieve a balance between long-term returns and short-term risks.

On the investment side, Fullgoal Fund, based on its rich experience in active quantification, empowers the development of passive products from an active quantification perspective; in serving investors, Fullgoal also leverages the power of quantitative research to provide ETF strategy mini-programs, ETF investment framework promotion services, and other services to assist customers in ETF investment decisions.

In terms of ETF development, CCB Fund has adopted a dual strategy. On one hand, the company focuses on the development and layout of innovative products, continuously improving the product spectrum and actively promoting the cultivation of strategic and scarce products. On the other hand, CCB Fund closely integrates the development strategy of ETFs into the group's overall pension strategy.

As a wholly foreign-owned fund company, Morgan Fund hopes to draw on the global background and vision of its shareholder, J.P. Morgan Chase & Co., to lay out some products for domestic customers from a diversified and professional perspective, such as characteristic ETF products. In the future, Morgan Fund will, on the one hand, explore overseas investment opportunities on a forward-looking basis in cross-border ETFs, and on the other hand, will be rooted in the local area to discover some characteristic strategy-themed ETF products.

 

The Challenge of Homogenization

Institutions know that the competition in ETFs is very difficult, and the products are highly homogenized. So, how to make a difference and win in fierce competition, how to break the homogenized competition of ETFs in the future? Will the recent craze of institutions investing in ETFs lead to the next "great retreat"?

For example, for a popular broad-based ETF, there are more than 20 homogenized products in the market. Some industry insiders believe that in the end, only about 5 companies are estimated to come out, and "the rest are just 'drinking soup' or 'accompanying running'".

An industry insider lamented, "The competition in ETF marketing has now become a business that doesn't make much money. It is estimated that the scale needs to reach 15 to 30 billion to balance profits and losses. The retreat of ETFs in the future is certain, and only when the tide recedes will we know who is swimming naked."

He believes that under the wave of low fees, only fund companies with more balanced development are likely to survive better. For example, although a fund company's index business does not make money, other businesses, such as "fixed income +" and equity scale, are relatively large, and ultimately, they may survive better than companies with a larger proportion of indices.

"For institutions, it's like 'Catch-22'. If you don't do it, you have no chance at all. What if you miss the trend of the times? If you do it, the investment may be wasted, and it's not worth the loss." The above-mentioned person lamented, "The key is that everyone wants to be blameless, and in the end, they are all swept along, and small and medium-sized institutions also follow the trend of ETFs."

Another head of an ETF at a top fund company also admitted that ETFs have indeed developed very rapidly in recent years, and everyone has laid out some products on the homogenized track.

But he is relatively optimistic. "On one hand, some index products are indeed scarce resources and still need to be laid out; on the other hand, in the public fund field, in fact, the increase in active equity and fixed income products in these two years, especially last year, is not very large, so the industry has turned to index products to strive to further increase the scale; in addition, this phenomenon of ETF homogenization is also more common overseas, but not as extreme as in the territory, because the development of domestic ETFs is relatively fast, resulting in more large broad-based index products."

But he does not agree that the current craze of institutions investing in ETFs will lead to a "great retreat" in the future.

His reason is, "Because everyone needs to allocate good assets, like the CSI A500, ChiNext 50, SSE 180, etc., they all represent the core broad-based indices of different market segments. The more basic assets, the higher the stability of the market. There is no need for institutions to 'retreat' in developing such products, because ultimately, investment still needs to allocate equity assets, and these large broad-based ETFs themselves already represent very good assets."

The person in charge of the above-mentioned fund ETF stated that the competition in ETFs will be very fierce in the future, but in the medium and long term, ETFs still have a very large space, that is to say, each fund company has a certain competitive advantage in its own strategy, its own method, its own customer group, and its own comparative competitive advantage. It is still far from the time when the top few have a high proportion, so everyone still has a chance, especially the top 20 ETFs, everyone is still in the process of continuous efforts, everyone is still competing on diversified strategies, on the差异化 path, and laying out related products in their own advantages.

In this regard, Zhao Yunyang, General Manager and Chief Investment Officer of Bosera Fund's Index and Quantitative Investment Department, also said in an interview that ETFs, as tools, currently have a rich variety, and to meet the needs of all types of investors, major institutions have also launched derivative products based on different investment strategies. The way to break through can be carried out from two aspects:

On the one hand, looking vertically, the development of index-based investment, especially ETFs, is a systematic project that requires the collaboration of multiple internal and external departments to build various capabilities: first, the ability to integrate strategy from top to bottom, second, the ability to layout the ETF product line with foresight, and third, the ability to operate and serve ETFs.

On the other hand, looking horizontally, the Matthew effect of ETFs is very significant both domestically and abroad, because ETFs require a large investment in resources and operational capabilities, and large companies have a significant advantage in this regard. Therefore, small and medium-sized institutions, they should combine their own genes and capabilities with a differentiated strategy to participate in the development of ETFs. For example, bank-owned fund companies, due to shareholder and customer advantages, may have more advantages in developing bond ETFs. Insurance-owned fund companies, due to the configuration needs of the shareholders, can pay more attention to broad-based and dividend ETF lines.

Wang Yi said that although the development of ETFs has made significant achievements, it also faces some problems and difficulties. ETF products are highly homogenized in investment strategies, tracking indices, and fees, leading to fierce market competition. The ETF market shows a "stronger get stronger" Matthew effect, a game for the top players, leading to resource concentration and making it difficult for new entrants to break through.

He believes that China's ETF market trading system is not yet perfect, some ETF products have insufficient liquidity, and there are liquidity risks. The competition in the future ETF market will extend from product creation to product operations, and fund companies need to integrate active management with product creation to provide a better asset allocation experience. The ETF market will shift from single-product competition to a comprehensive solution competition of portfolio and strategy, and fund companies need to launch better ETF solutions to help investors allocate various ETFs. With the opening of the capital market and the advancement of ETF internationalization, the future ETF market will pay more attention to international layout and provide global asset allocation opportunities.