The exchange-traded fund (ETF) market appears to have undergone a remarkable transformation over the past two decades, culminating in the year 2024. This transformation has not only revitalized the ETF arena but has also ushered in a new era for the capital markets as a wholeWith over a thousand ETFs available and a total market capitalization surging to an impressive 3.7 trillion yuan, ETFs are now dominating the investment landscape, particularly as their holdings surpass those of actively managed funds for the first timeThis burgeoning popularity can be attributed to various advantages that ETFs offer, including their tool-like nature, high liquidity, and low trading costs, which have collectively piqued the interest of a widening array of investors.
However, the rapid expansion of the ETF market has not been without its challengesA significant issue that has arisen is the increasing homogeneity among ETF products
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As numerous funds spring up to track popular indices and investment segments, investors frequently find themselves grappling with a bewildering array of choicesTake, for example, the CSI A500 index, which was launched in September of the previous yearAs of mid-January, the sheer number of CSI A500-related funds exceeded 110, with total assets breaching 350 billion yuan, resulting from the involvement of over sixty different fund companiesThis oversaturation of similar products has compounded the difficulties faced by investors.
In this intensely competitive environment, it begs the question: how can fund companies distinguish themselves when it comes to product design, marketing, management, and operations?
Recognizing the urgency of the situation, several prominent fund firms, including Huaxia Fund, GF Fund, Harvest Fund, Bosera Fund, and Invesco Great Wall Fund, have stepped up their offerings in ETF development and management
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They have launched various dedicated ETF and index mini-programs aimed at providing comprehensive services that enhance the user experienceClearly, the fund industry has acknowledged the pressing need for more refined management and service delivery in the ETF space.
To address the issue of product differentiation, fine-tuned management has taken center stageThe current state of the ETF market is characterized by an overwhelming number of indices, which presents a unique set of challengesThe proliferation of similar products has created an environment of intense competition, making it imperative for fund companies to ramp up their efforts in meticulous management and optimization of various processesThis endeavor aims to emphasize their distinct competitive advantages.
As articulated by Morgan Asset Management, ETFs are inherently complex investment instruments that offer remarkable convenience to investors through a series of design mechanisms spanning across investment, trading, and product levels
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Nevertheless, this complexity poses even greater challenges for fund companiesThey must excel in several interconnected facets such as investment strategy, trading execution, risk control, operational capacity, and systemic infrastructureA symbiotic relationship with external entities, including market makers and institutional investors, is also vital to cultivate a healthy and robust ETF ecosystem.
To ensure the sustained success of ETF offerings, Morgan Asset Management prioritizes investor protection while continuously enhancing their operational management capabilitiesThe firm is committed to refining its internal processes, improving system infrastructure, and optimizing personnel allocation to elevate the overall management of ETFsFurthermore, there are plans to introduce international investors and foreign market makers into the fold to broaden the customer base and improve the investment structure through a dual-focused strategy of internal and external advancements.
When managing specific products, Morgan Asset Management emphasizes a comprehensive approach from the outset, taking into account liquidity and market impact costs
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Throughout the day-to-day management of ETFs, adjustments are made to rebalance the portfolio based on disparities between PCF weights and index weights while simultaneously addressing dividend payouts from underlying stocks to keep the fund aligned with its benchmark indexThe firm makes concerted efforts to minimize operational costs encountered in ETF management to optimize investor returns.
This effort is echoed by Guotai Junan Fund, which acknowledges that managing an ETF involves significant resource investmentsThe costs associated with establishing a small, yet liquid, ETF are substantialEffective ETF growth requires continuous financial input to maintain operations, coupled with the need to build liquidity and foster communication with market makersAs competition intensifies in this sector, Guotai Junan is focused on capitalizing on new market opportunities while enhancing resource allocation toward team-building, marketing initiatives, and specialized sales for ETFs.
From the perspective of Haifutong Fund, professionalism and systematic procedures are crucial in the ETF investment space
The firm’s passive investment philosophy centers on closely tracking indices without pursuing risky alpha strategiesThey maintain an acute awareness of investor psychology and strive for a presence in their clients’ decision-making processes, particularly during periods of market volatility when anxiety can drive poor investment decisionsHaifutong emphasizes the importance of supporting clients through emotional challenges, supplemented by regular engagement activities designed to foster a sense of security and trust.
Additionally, Haifutong places a strong emphasis on its bond ETF offerings, like its sample replication strategy for the recently launched Shanghai Stock Exchange Benchmark Corporate Bond ETFThis strategy focuses on constructing portfolios that closely mirror the risk and return characteristics of the index while controlling tracking error through selective security choices, duration adjustments, and treasury futures transactions.
With index investment gaining traction among investors as a primary market entry point, fund companies are increasingly prioritizing the development of tailored customer service systems for passive investment services.
Fund companies are now actively taking steps to categorize investors based on their unique preferences and requirements
National Tianfu Fund's quant team encapsulates the ethos of this approach, asserting that the core focus should remain on fulfilling the genuine needs of diverse investor segments—both through allocation and transactional servicesEqually important is the acknowledgment of individual investors as integral contributors to ETF liquidity and scale, particularly within smaller-scale ETFs.
Furthermore, Haifutong has pioneered high-frequency interaction channels with investors and introduces weekly ETF research updates to maintain transparent communicationWith sophisticated tracking mechanisms in place, investment managers and researchers are closely monitoring notable shifts in policy and macroeconomic trends that could impact investor strategies.
As for future prospects, several institutions collectively express the belief that innovation will be key to the continued growth of ETFs
Guotai Junan Fund asserts that with competition in established sectors like broad-based ETFs already intense, avenues for growth will hinge upon exploring untapped market nichesThe company envisions enhancing their product line through a dual approach of comprehensive asset and sector allocation strategies, focusing on innovative ETFs while meeting the demands of a wider spectrum of investors.
Taikang Fund proposes a clear delineation between broad-based indices and niche sectors for future ETF developmentsThey emphasize the critical nature of operational logistics and differentiation in investment research to build competitive strength and product effectiveness.
Research conducted by Caixin Securities suggests that innovation in ETF design, investment strategies, transaction mechanisms, and technological advancements will serve as a crucial avenue for addressing the evolving landscape of ETF products