Exchange-traded funds (ETFs) have quickly won favour among investors globally in recent years, with many choosing the passive investment product over actively managed ones because of lower costs and convenience in trading.
Investors continue pouring money into ETFs despite a challenging investment landscape, including entrenched inflation and a flare-up in geopolitical tensions.
China is no exception to the trend, with ETFs even becoming a key channel for state-backed funds to prop up the market. Inflows into ETFs linked to the underlying CSI indices of small and big-capitalisation stocks have seen spikes since early this year in an increasing sign of state buying to revive confidence in the broader market.
What is an ETF?
An ETF is a type of passive investment product that typically tracks a basket of assets such as stocks, bonds, currencies, commodities and even futures contracts. Just like ordinary shares, an ETF can be freely bought and sold on stock exchanges during trading hours, an advantage over traditional mutual funds, which investors can only buy or sell once a day after the end of the day’s trading.
Most ETFs are index-based and they mimic the composition and the performance of a specific gauge, such as the S&P 500 Index or the Hang Seng Index. The first ETF was launched in 1993 in the US, and after three decades of development, the total assets under management (AUM) of ETFs globally stood at US$11.5 trillion at the end of 2023, according to PwC.
Globally, ETFs recorded inflows of US$800 billion last year, while a similar amount was withdrawn from mutual funds.
BlackRock, Vanguard and State Street are the world’s top three managers of ETF products, accounting for about two-thirds of the market.
Why have ETFs become popular with investors?
First, ETFs give holders exposure to a broader asset class, an index or an industry through a single vehicle, sparing investors the trouble of picking stocks that sometimes can prove to be challenging even for professionals.
Second, ETFs have lower trading costs. Index-based ETFs charged an average 0.5 per cent in fees in 2023, compared with 0.8 per cent for index-based mutual funds, according to US research firm Morningstar.
Third, increased volatility in global financial markets has made it difficult for actively managed funds to outperform the benchmarks and deliver above-average returns, boosting demand for passively managed products. The demand has also been bolstered by demand from expanding global pension funds seeking stable investment returns.
In 2023, active fund managers saw mixed success. More than 60 per cent of such fund managers beat passive peers targeting large-capitalisation stocks and the healthcare sector, while less than 30 per cent outperformed in sectors ranging from consumer goods and technology to telecoms, according to Morningstar.
How far have ETFs come along in Asia and China?
The AUM of ETFs in Asia totalled US$1.3 trillion at the end of May, according to independent research firm ETFGI. An influx of US$118 billion was recorded in the first five months of the year, a 16 per cent year-on-year increase, ETFGI said.
The AUM of China-domiciled ETFs reached 1.82 trillion yuan (US$250.3 billion) at the end of 2023, more than double that at the end of 2020, according to Morningstar. Inflows rose to a record 604.3 billion yuan last year, almost five times the figure in 2021, it said.
China had 870 ETFs at the end of last year, of which 96 per cent were stock-based products. ETFs tracking bonds numbered only 17, Morningstar said.
Who are the biggest players in China?
China Asset Management, E Fund Management and Huatai-PineBridge Fund Management are the top three ETF managers in China, according to Morningstar.
China Asset’s ETF AUM totalled 392.2 billion yuan in 2023 and that of E Fund and Huatai-PineBridge stood at 256.9 billion yuan and 193.8 billion yuan, respectively, the firm’s data showed. The trio accounts for 46 per cent of the domestic ETF market.
The biggest China-domiciled ETF is the 195.2 billion yuan Huatai-PineBridge CSI 300 ETF, which tracks the underlying CSI 300 Index and trades on the Shanghai exchange, according to Bloomberg data.