ETFs
What are ETFs? How did they become the new darling of investors around the world?
Exchange-traded funds (ETFs) have rapidly gained favor among investors around the world in recent years, with many choosing the passive investment product over actively managed ones due to lower costs and convenience of trading.
Investors continue to pour into ETFs despite a challenging investment environment, including entrenched inflation and rising geopolitical tensions.
China is no exception to the trend, with ETFs becoming a key channel for state-backed funds to prop up the market. Flows into ETFs linked to the underlying CSI indices of both small- and large-cap stocks have spiked since the beginning of this year, a growing sign of state purchases 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. Much like regular stocks, an ETF can be freely bought and sold on exchanges during trading hours, which is an advantage over traditional mutual funds, which investors can only buy or sell once a day after the end of the trading day.
Most ETFs are index-based and replicate the composition and performance of a specific indicator, such as the S&P 500 Index or the Hang Seng Index. The first ETF was launched in 1993 in the United States, and after three decades of development, total assets under management (AUM) of ETFs worldwide stood at US$11.5 trillion at the end of 2023, according to PwC.
Globally, ETFs saw inflows of $800 billion last year, while a similar amount was withdrawn from mutual funds.
BlackRock, Vanguard and State Street are the top three global ETF managers, representing about two-thirds of the market.
BlackRock, Vanguard and State Street are the three largest global ETF managers, accounting for about two-thirds of the market. Photo: Reuters
Why have ETFs become popular among investors?
First, ETFs offer holders exposure to a broader asset class, index or sector through a single vehicle, saving investors the hassle of picking stocks that can sometimes be difficult, even for professionals.
Second, ETFs have lower transaction costs. Index ETFs charged an average of 0.5% in fees in 2023, compared with 0.8% for index mutual funds, according to U.S. research firm Morningstar.
Third, increased volatility in global financial markets has made it difficult for actively managed funds to outperform benchmarks and generate above-average returns, which has boosted demand for passively managed products. Demand has also been bolstered by demand from growing global pension funds seeking stable returns.
Active fund managers had mixed success in 2023. According to Morningstar, more than 60% of them outperformed their passive peers targeting large-cap stocks and the healthcare sector, while less than 30% outperformed in sectors ranging from consumer goods and technology to telecommunications.
Where are ETFs in Asia and China?
According to independent research firm ETFGI, ETF assets under management in Asia stood at US$1.3 trillion as of the end of May. An inflow of US$118 billion was recorded in the first five months of the year, a 16% increase from a year earlier, ETFGI said.
According to Morningstar, assets under management of China-domiciled ETFs reached 1.82 trillion yuan ($250.3 billion) by the end of 2023, more than double what they were at the end of 2020. Inflows hit a record 604.3 billion yuan last year, nearly five times the figure in 2021.
As of the end of 2015, China had 870 ETFs, 96% of which were equity-based products. ETFs tracking bonds numbered just 17, according to Morningstar.
Who are the biggest players in China?
According to Morningstar, China Asset Management, E Fund Management and Huatai-PineBridge Fund Management are the three largest ETF managers in China.
In 2023, China Asset’s ETFs totaled 392.2 billion yuan, while those of E Fund and Huatai-PineBridge were 256.9 billion yuan and 193.8 billion yuan, respectively, according to the company’s data. The trio accounts for 46% of the domestic ETF market.
The largest 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 Stock Exchange, according to Bloomberg data.