Demand Surges for China’s Exchange-Traded Funds

September 30, 2020 — Singapore

Strong retail and institutional demand will drive the ETF boom in the long run

China’s passive funds have showed outstanding record performance in recent years, with year-on-year (y-o-y) non-money market exchange-traded fund (ETF) assets under management (AUM) growth jumping from 13.4% in 2017 to 64% in 2018. Since then, ETF growth has been on the fast lane, as investors get more accustomed to utilizing these vehicles for enhanced portfolio construction. In 2019, ETFs continued to flourish, with non-money market AUM increasing nearly 50% y-o-y to RMB570.0 billion (US$81.6 billion).

Equity ETFs took the bulk of non-money-market ETF assets at 94% and recorded solid y-o-y AUM growth of 53.3% in 2019, backed by bullish capital market returns. This trend extended to the first half of 2020, though at a slower pace of 14.9%. During these six months, commodity ETFs saw the highest asset surge of 45.2% to surpass RMB20 billion.

Cerulli notes that Chinese investors’ sentiments were not dampened by COVID-19 in the first half of 2020, with RMB58.5 billion raised for new ETF launches, up by 121.7% compared to the same period in 2019. Extensive online marketing and distribution initiatives during the lockdown boosted sales.
Besides capital market movements and managers’ consistent efforts in marketing and distribution, factors boosting the popularity of ETFs include their relatively low fees, usually around 0.5% compared to equity mutual funds’ average management fees at around 1.5%. Investors also favor ETFs for their liquidity, transparency, and diversification. Diversified ETF strategies ranging from broad index to emerging areas, such as environmental, social, and governance (ESG) and exotic overseas exposure, are available to cater to the different needs of investors.

Cerulli believes there is plenty of room for mid- and small-sized managers to grow their assets by developing innovative ETFs, rather than traditional strategies. This can be seen from the reduced market concentration of the top-10 players, from 82.0% in December 2019 to 79.2%. To stand out from the competition, managers need to move quickly to market themes, build research into niche areas, improve their track records, and find supportive distributors.

As of July 2020, more than 50 ETFs were awaiting the China Securities Regulatory Commission’s (CSRC’s) approval to be launched. Given the sector’s rapid development, the CSRC issued draft guidelines governing index funds and ETFs in end-July to standardize operations and protect investors’ interest, for example, through better information disclosure and stricter index selection criteria. The Shanghai Stock Exchange and Shenzhen Stock Exchange followed up by issuing complementary rules, adding new requirements for index funds and ETFs.

“Cerulli believes China’s ETF growth will continue, though it might slow down due to recently enhanced regulatory scrutiny,” said Ye Kangting, senior analyst with Cerulli Associates. “In addition to the above factors, the sector’s bright prospects could be supported by the mutual fund investment advisory pilot scheme launched last October and a possible future tax-deferred scheme for third-pillar pension-related funds of funds, because ETFs can serve as low-cost and effective underlying assets.”

Note to editors

These findings and more are from The Cerulli Edge—China Edition, 3Q 2020 Issue.

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