ETFs (exchange-traded funds) have been developing in China for nearly 20 years. During this period of time, ETF products have experienced continuous accumulation and innovative breakthroughs, and have gradually become an important tool for investors to allocate assets. For individual investors, they often face the problem of "difficult to choose and unable to trade flexibly" when buying traditional**, while ETFs provide investors with a more diversified option.
Step into a new world of indexed investing
A year ago, it would have been hard to imagine that dividend strategies, cross-border assets and ** would be the main investment themes throughout the year. This also means:Cash is no longer just a liquidity management tool, but an "asset" that needs to be focused on separately. The investment market is always changing rapidly, and active management tends to focus on the alpha of a certain type of asset, but it takes time to gain experience and has limitations on identifying systemic risk and adapting to changes in multiple assets. When the investment environment changes dramatically, it usually means that investors need to upgrade their investment strategies, redefine their investment objectives and choose new investment vehicles. In this context, the flexibility benefits of passive investing come to the fore. In the Chinese market, the rise of ETFs is happening in this context. Professional investors often refer to the word "exposure" when making asset allocation or selecting investment targets. It is "exposure" in English, which means a portfolio's preference for a particular asset or style, as well as the corresponding risk exposure. We refer to the word "exposure" repeatedly. Choosing an exposure is a clear reflection of an investor's investment views and values. In our view, ETFs are tools for expressing investment views. Today, there is a wide variety of ETFs in China, allowing ordinary investors to use them to express a variety of mainstream investment views. Whether it is a large class of assets, industry themes, domestic stocks and bonds, cross-border investment, or even ** and cash, there are corresponding ETFs as investment tools. When a point of view is widely accepted, it becomes consensus. In this sense, ETFs that are growing rapidly or ranking high represent the consensus of the majority on the direction of investment. Consensus will change over time, which means that the ETF market will continue to be vibrant. Time flies. People today still remember that a decade ago, high-yield fixed income was the mainstream of financial markets, but that era is long gone. For many Chinese households, indexed investment combined with global asset allocation is a more worthwhile prospect to explore. As the saying goes: "The light boat has crossed the Ten Thousand Mountains". We are accelerating towards a new world of indexed investing. Hopefully, this unique ETF annual outlook will bring you new insights and inspiration. 
Behind the expansion of ETFs against the trend, the Asia-Pacific market is in the first stage of development
In 2023, the share and AUM of ETFs in China will both exceed 2 trillion yuan, an increase of more than 20% from the beginning of the year. The number of products reached 891, with 160 new products being released during the year. As pointed out in the foreword, the rapid expansion of the Chinese mainland ETF market in 2023 is related to the changes in the capital market ecology in the past two years. In China's public offering market, the scale of traditional over-the-counter (OTC) bonds and hybrid markets is dominant. In the field of ETFs, whether it is the scale of management or the number of products, ** ETFs occupy an absolute advantage. As of the end of 2023, the size and volume of ** ETFs accounted for respectively. 60%γ
Taking the phenomenon of the rapid development of the local ETF market into a larger perspective, the overall penetration rate of ETFs in the Asia-Pacific region has increased rapidly and is in the first period of development. ETFGI data shows that as of the end of the third quarter of 2023, the net inflow of funds in the Asia-Pacific (excluding Japan) ETF market exceeded US$119.5 billion, the 27th consecutive month of net inflows, and the size of ETF assets increased from US$578.7 billion at the beginning of the year to US$698 billion, an increase of 20.0%.6%γIn the Asia-Pacific region, Chinese mainland is still not the fastest-growing market for ETFs. Thanks to a lower base, the ETF market in India and Taiwan has grown by more than 300% since 2019.
ETF market structure
The *-type ETF market is ushering in more large-scale broad-based ETF products. Among the ** ETFs, the size of the broad-based ETF accounts for nearly half of the market share, and although it has declined from a decade ago, it still ranks first. This is followed by thematic index ETFs, cross-border ETFs, and sector index ETFs. The main difference between a thematic index ETF and a sector index ETF is that the constituents of a thematic ETF can cover multiple sectors, while the constituents of an industry index ETF are usually concentrated in a single sector. The relatively small market share of strategy index (i.e., smart beta) and style index ETFs is related to the fact that the ETF market is still relatively low in popularity. As of 2023, there are 11 broad-based ETFs in China with a scale of more than 10 billion, and in August 2023, a super large-scale ETF with a scale of more than 100 billion yuan was born, including Huatai Pineapple CSI 300 ETF, which has a scale of more than 90 billion yuan. This shows that investors' interest and demand for broad-based ETF products continue to grow, indicating that the first-class ETF market will continue to grow in the future.
The SIZE Index ETF market shows a clear Matthew effect, where there is a huge gap between the number one and second ranked products. In a series of CSI 300 ETFs, the size of the first place is 276 times;In the STAR 50 ETF, the size of the first place is 301 times;In the SSE 50 ETF, the gap between the first and second places is as high as 1280 times. It has always been a hot topic in the industry about which indices have strong representativeness and investment attractiveness in the A** market. From the perspective of global asset allocation, the constituent stocks of the CSI 300 Index fully demonstrate the most representative leading companies in the major industries of China's economy, and are therefore considered to be the "most accurate representation of China's economy" exposure. Surprisingly, despite the poor performance of the financial and real estate sectors for many years, the scale of related ETFs still exceeds 100 billion yuan. In addition, in recent years, the scale of ETFs in the pharmaceutical and medical, electronics, and computer-related industries has grown rapidly, compared with the growth rate at the end of 2022. 12% and 9619%γMost themes and sectors** increased in size over the same period, but themes such as infrastructure and transportation decreased by 4180% and 5405%γ
Bond ETFs don't yet have the market conditions to proliferate
The years 2018 and 2022 are considered bond ETFs"Big year", because the size of bond ETFs has increased by more than 100% annually. This means that when the equity market enters a downward phase of a longer cycle, investors are more inclined to buy bond ETFs as a hedge. In addition, the stock and bond market itself exists certainly"Seesaw"effect, when economic growth slows, the market usually performs weakly, and at the same time, central banks tend to implement accommodative monetary policy, which increases the likelihood of bond markets. Overall, the scale of domestic bond ETFs is relatively small, and has not yet reached the scale of 100 billion. In terms of structure, the scale of credit bond ETFs and policy financial bond ETFs is relatively large, with 3076.9 billion and 2880.1 billion yuan, and the scale of HFT CSI Short-term Financing Bond ETF reached 2472.8 billion yuan, which investors see as an alternative to the currency**. The size of convertible bond ETFs, local ** bond ETFs, treasury bond ETFs and urban investment bond ETFs is 66 respectively3 billion yuan, 584.7 billion yuan, 519.1 billion and 291.5 billion yuan. The data reflects investors' demand for different types of bond ETFs, as well as their interest in seeking fixed income and safe-haven assets. As the bond market further develops and investors' awareness of bond ETFs increases, bond ETFs are likely to continue to attract more capital investment.
Overseas, banks and insurance companies are the main holders of bond ETFs, and they hold these ETFs mainly through allocation. However, there are some ecological differences between the exchange market and the interbank market in the domestic bond market, which makes bond ETFs not yet usher in comprehensive development opportunities in China. For general investors, bond ETFs do not have obvious advantages in investment income compared with over-the-counter fixed income products, and ordinary investors' liquidity needs for such products are not very strong, which also limits the development of bond ETFs. In terms of commodity-based ETFs, despite their small size, the focus on energy competition in countries around the world since 2020 has once again made commodities an indispensable allocation asset. By the end of 2023, among the domestic commodity ETFs, **ETF is the largest and most numerous, with a total scale of 2903.8 billion yuan. In addition, there are products such as soybean meal ETFs, non-ferrous metal ETFs, and energy and chemical ETFs. These data show that despite some challenges faced by bond ETFs in China, commodity ETFs are gradually gaining momentum in asset allocation, reflecting investors' interest and demand in the commodity market. In the future, these markets are likely to continue to grow as the market continues to evolve and investors' awareness of different types of ETFs increases.
The main pricing logic of commodities is influenced by supply. For example, in the past decade, oil and gas companies have reduced their capital expenditures due to environmental and ESG reasons, which has severely limited supply capacity. After 2020, **persistence** is a clear proof of insufficient supply.
The capital expenditure cycle of resource-based enterprises is usually 5 to 10 years, and capacity expansion is not achieved overnight. At the same time, under the global consensus of carbon neutrality, it is more difficult for traditional oil and gas companies to expand production capacity. Therefore, ** will remain in a tight equilibrium for quite some time to come. In addition, in 2020, the central banks of Europe and the United States adopted a more in-depth practice of Modern Monetary Theory, and a large amount of money flowed into the market, permanently increasing the ** center of most assets, including commodities. Before the demand for commodities represented by ** peaks, the gap between supply and demand in the medium and long term still exists, which may support commodities to remain high for a long time. Therefore, not only will the commodity ETFs and ** ETFs linked to the physical object usher in an explosion in demand, but also the companies in the global commodity industry chain will also attract attention.
ETFs are also expected to continue to attract capital. In the future, as the attributes of real estate as an investment product decline, Chinese families will look for new wealth storage tools. ETFs have a relatively high correlation with physical objects and are easy to trade, which will benefit from the evolution of the investment environment. Since April 2023, Shanghai's premium relative to the world's premium has continued to rise, showing an increase in investor demand. For ordinary investors, asset allocation is the only free lunch in investing. The correlation with asset classes such as bonds, bonds, etc., is low, and even negatively correlated in some specific periods. Allocation to a subset of ETFs can effectively diversify your portfolio's risk while responding to the changing inflationary environment.
Currency ETFs become another asset when cash
At present, there are 27 currency ETFs in China, of which the two largest are Huabao Tianyi A and Yinhua Rili A. Currency ETFs were born in 2012 and reached their peaks in 2015 and 2021, respectively. Whenever ** enters the bull market phase, the currency ETF as a reserve of funds on the floor will usher in rapid growth in scale. Domestic currency products are strongly correlated with transactions and payment scenarios. In the past, the logic of the average investor holding currency products was because they had a higher yield relative to cash. In other words, the driving factor in the scale growth of currency products in the past two rounds is mainly because of their "high yield" and "high liquidity" characteristics. In the future, currency ETFs may usher in a new logic of scale expansion, that is, more and more people will look at cash with more "asset" thinking. In the past, most people thought that investing should outperform inflation and M2 money** growth, but as demographics, macro leverage, geopolitics and other factors evolve, interest rates and economic pivots are likely to move downward. As a result, cash alternatives to holding cash or currency-like ETFs may become an unavoidable investment option. This reflects the fact that investors are looking for ways to preserve capital and stabilize income while seeking safety and liquidity.
Cross-border ETF global asset allocation set sail
In recent years, the size of cross-border ETFs has grown at the fastest rate. At the end of 2019, the scale of cross-border ETFs accounted for only 375%, but in the following years, this proportion continued to increase, and by the end of 2023, the scale accounted for nearly 14%.
Between 2021 and 2023, the share of a number of China Connect ETFs, Hang Seng Connect ETFs and Hang Seng Tech ETFs increased rapidly. At the same time, due to the relatively stable performance of overseas**, the scale of products such as Nasdaq ETF and S&P 500 ETF is also increasing rapidly. In addition, the growth of cross-border ETFs is also of special significance to domestic companies and brokers.
Starting from the end of 2022, overseas brokers' cross-border** business is restricted from opening new accounts for mainland clients. Through cross-border ETFs (QDII), domestic brokerages have undertaken a part of the retail brokerage business of Hong Kong and U.S. stocks in disguise. A series of targets with clear investment directions, such as China-Korea Semiconductor ETF, Nasdaq Technology ETF and Pan-Southeast Asia Technology ETF, have been launched, and domestic investors can make simple and legal cross-border investments through ETFs, which is no longer a problem.
Up to now, domestic QDII rights** have achieved coverage in major countries and regions around the world. Due to differences in market opening hours, historical product layout, etc., many QDIIs**, including those in Vietnam and India, do not exist in the form of ETFs, but are actively managed over-the-counter**. These developments reflect the growing interest of domestic investors in cross-border investment and the role of cross-border ETFs in helping them achieve global asset allocation.
In the ETF industry ecology, head effect is an unavoidable topic. As of the end of 2023, the largest management company in non-monetary ETF management is ChinaAMC**, whose scale has exceeded 400 billion yuan, and ChinaAMC** alone occupies one-fifth of the market share. As the first company in China to deploy ETF products, ChinaAMC issued its first ETF in China, ChinaAMC SSE 50 ETF, in 2004.
The company's product line is becoming more and more perfect, and now covers broad-based, industry, theme, strategy, cross-border, commodity and other fields, and the number of ETF products has reached 81, and its leading position is relatively stable. E Fund, Huatai Pinebridge, Cathay Pacific** and Nanfang** ranked second to fifth respectively in terms of non-monetary ETF AUM, with a scale of more than 100 billion yuan. The market share of the top five management companies is close to 60%, and the market share of the top 20 management companies is more than 97%, and the Matthew effect in the ETF industry is very obvious.
In the face of the fragmentation and increasingly fierce competition in the ETF market, leading companies continue to consolidate their positions by virtue of their advantages in product structure and diversity. As of the end of 2023, there are 33 non-monetary ETFs with a management scale of more than 10 billion, of which ChinaAMC** accounts for 7, followed by E Fund and Huatai Pineapple with 5 and 4 non-monetary ETFs with more than 10 billion yuan respectively. Some management companies have also chosen to expand their market influence by subdividing categories, such as Cathay Pacific**, Huabao**, etc., and their product lines are more focused on industry-themed ETFs. In addition, there are some management companies that seek to pursue differentiation and take a share of the highly competitive ETF market by creating popular single products, such as HFT**, which owns the largest bond ETF in the industry, the short-term financing ETF; Guolianan** has emerged through semiconductor ETFs and has become a model for small and medium-sized institutions to emerge in the ETF market.
In the development path of passive product lines (including ordinary index**) in China, the main feature of equity index products is that they reflect the industry trends and the preferences of local investors. The chart below illustrates the investor preferences reflected in the top equity index products across the market. From a global perspective, technology and medicine are the two most competitive industry-themed ETF tracks, and future industry giants are mainly born in these fields. This is in line with the idea of winning exposure in investing, where investors take advantage of an uptrend in the market by choosing a specific sector or thematic ETF.
ETF in the second half of the company's product layout direction
In the past two years, the A** market has undergone a **adjustment, and the money-making effect of active equity has declined, while ETFs have become a bright spot in the market. In addition to the continuous influx of funds into existing ETF products, the ETF issuance market has also become very hot, and various ** companies are vying to launch new products, hoping to seize the first-mover advantage. Based on the subscription start date, a total of 27 public offering ** companies will issue 160 new ETF products in 2023, with a total issuance size of more than 102.3 billion. In terms of the number of new ETFs, the top three companies are E Fund, ChinaAMC and GF, which issued 18, 13 and 12 ETF products respectively. In terms of issuance scale, the top three ** companies are E Fund**, ChinaAMC** and Wells Fargo**, among which E Fund** and ChinaAMC**'s 2023 ETF issuance scale will exceed 10 billion. This shows that the ETF market is still very popular in a cold market environment, with companies racing to launch new ETF products to meet the growing demand from investors.
Observing the new product layout of ETF managers since 2023, from the perspective of the type of linked index, broad-based indices are still a must for ETF managers. The most impressive thing in 2023 is that the STAR 100 has been favored by many ETF managers as soon as it was launched, and many ** companies have actively applied for related products. The first batch of four STAR 100 ETFs have only been in the past month since they were declared, approved for issuance and finally listed on August 10, and the number of managers who have deployed STAR 100 ETFs has increased to 8. The STAR 100 ETF has also become one of the few new products in 2023 that continues to grow in share after listing. A few takeaways from the STAR 100 ETF: First, market capitalization is the most mainstream and possibly the most effective index style and weighting method, and broad-based is the most easily accepted variety among passive products. Second, the A-share index-linked ETFs have been saturated, and in the long run, the emergence of a new "large broad base" requires a major innovation in the industrial structure of the capital market. Third, from an exchange perspective, the BSE 50 could be the next big opportunity for scale index ETFs. As large-scale ETFs become saturated, some managers have begun to focus on strategy ETFs (i.e., smart beta) and cross-border investments. In the context of economic slowdown and quality improvement and downward risk free interest rate, the investment value of assets with high certainty and stable dividend ability is highlighted. Since 2023, 8 public offerings** have added dividend ETF varieties, including products with a single dividend factor and ETFs with a superposition of dividends and low-volatility factors.
In addition, in the face of increased volatility in A-shares, adding overseas assets with low correlation to A-shares and positive long-term development trends to diversify the risk of the single market and broaden the returns** has become the way for many ** companies to break the situation. In 2023, 14 managers issued a total of 21 cross-border ETFs, covering broad-based indices of Hong Kong and U.S. stocks, as well as thematic indices such as technology, consumption, and oil. On the other hand, the rapid expansion of the number and scale of ETFs is that the homogeneous competition of ETFs has intensified, and the fee war has swept across ETFs. Looking ahead, the creation of ETF categories will further test the company's in-depth research and judgment on the market environment and investor acceptance. Whether an ETF can grow big depends not only on whether the exposure is clear enough, but also on the cooperation of the corresponding market**.
Conclusion
As this article concludes, we have not only witnessed the rapid development of China's ETF market over the past two decades, but also gained a deeper insight into its unique role in the global financial landscape. From initial exploration to mature development, ETFs have not only formed an important part of China's capital market, but also opened up a new world of asset allocation for individual investors. Its versatility and flexibility make it ideal for different investment ideas and needs. Facing the future, China's ETF market still has broad room and potential for development. As the market structure matures and investors become more aware of ETFs, we expect to see more innovative products and strategies emerge to provide more diversified asset allocation solutions for investors in China and around the world. The development of China's ETF market is not only a history of financial product innovation, but also a microcosm of China's economic growth and opening-up. The story of ETFs in China continues to be written. Like a ship setting sail, it has crossed the rough seas and is sailing towards a broader and far-reaching investment sea. In this process, ETFs are not only a tool for navigation, but also a beacon to guide the direction, illuminating the path of diversification and globalization of capital markets. Each innovation and breakthrough is a solid proof of the deepening development of China's financial market, and also a contribution to the diversity and connectivity of the global capital market. We look forward to the future journey of ETFs in the Chinese market, and believe that they will continue to serve as the crystallization of investors' wisdom and lead the capital market to a more mature, efficient and harmonious direction.