China’s exchange-traded fund (ETF) AUM, excluding money market ETFs, rose 14.7% to $93.6bn during the first five months this year, according to a report published by Boston-based research firm Cerulli Associates.
This was the fastest among Asia (ex-Japan) markets, led by technology-related ETFs, the report said.
New ETF launches in the mainland have also contributed to AUM growth. During the first half, 44 ETF products were rolled out in China and raised RMB 31.4m ($4.48m) during their initial public offering, according to data provided by Morningstar.
Among the new ETFs that attracted sizable assets during their IPOs include the Yinhua CSI Brand Name Drug Industry ETF (RMB 4.9m raised), the CCB Principal CSI Security Agency ETF (RMB 2.9m) and the Penghua CSI Media ETF (RMB 2.4m), Morningstar data shows.
Last year alone, ETF AUM in China (excluding money market products) grew 49.7% to $81.6bn, according to the Cerulli report. The firm expects the market to continue to grow, supported by industry developments.
For example, the China-Japan ETF Connectivity went live last year, allowing fund management firms in both markets to utilize cross-border investment quotas to mutually onboard ETF feeders to tracking indices, the report said.
In addition, ETF growth could be further boosted by the mutual fund investment advisory pilot scheme that was launched in October last year, given that they are low-cost and effective investments for such a model.
The scheme allows managers and distributors to tailor investment options for clients based on their financial status and financial management needs and restricts fees to no more than 5% of investors’ net asset value.
However, Cerulli noted that it remains to be seen whether the scheme can succeed in the mainland, given that investors are used to the transaction-based model. In addition, the firm believes that Chinese investors still prefer to use ETFs for trading rather than for long-term investments.
Overall Asia ETF assets down
While China ETF assets are up, overall Asia (ex-Japan) assets fell 0.8% to $245bn during the first five months, amid volatile market conditions triggered by the Covid-19 pandemic, according to the report.
Taiwan, for example, which led ETF AUM growth in the region last year with assets rising 130.6% to $55.7bn in 2019, saw its assets fall to $54.5bn in May.
Cerulli noted that ETF growth last year was led by insurance companies seeking to beef up their overseas allocations through ETFs. However, this trend is likely to slow down in the near term, following new regulations released in September to limit the frequency of bond ETF launches and the high volatility in the US credit market in March.
Similarly, Hong Kong’s ETF assets were up 8.5% last year to hit $35.6bn, but decreased 12% this year to $31.2bn in May, according to the report.
The market is dominated by products tracking Hong Kong or Greater China indices, Cerulli said. However, it expects that recent regulatory initiatives will likely help develop the ETF market further and offer more product choices to investors.
For example, in December, the Securities and Futures Commission (SFC) allowed SFC-authorised feeder ETFs to invest in non-SFC authorised overseas master ETFs on a case-by-case basis. Blackrock is the first firm to take advantage of the new regulation and recently launched the iShares MSCI Emerging Markets ETF (HK), which is a Hong Kong-listed feeder ETF that offers exposure to its Ireland-domiciled $3bn iShares MSCI Emerging Markets ETF.
Cerulli added that Hong Kong’s government recently waived the stamp duty on stock transfers paid by market makers when creating and redeeming ETF units in Hong Kong, which will likely reduce the transaction costs of ETFs.
