China’s burgeoning exchange traded fund industry has been outshone by the explosive growth of domestic active strategies this year, with market participants blaming a persistent lack of knowledge among retail investors and weak product diversity as the key barriers to higher adoption of ETFs.
Only 91 new ETFs had been rolled out in China this year by December 8, a number that only just exceeds the 90 such product launches recorded for 2019, data provided by Morningstar show. Total assets in the onshore ETF market stood at Rmb1.06tn ($162bn).
The modest total for this year is in sharp contrast to the more than 1,200 non-ETF fund launches during the same period. Active equities funds grabbed most of the limelight attracting almost 65 per cent of initial fundraising assets out of a record-breaking Rmb3tn in assets invested across all fund types.
Most individual investors in China still have insufficient knowledge of ETF products, according to a survey jointly conducted by JPMorgan Asset Management, its Shanghai-based joint venture China International Fund Management and investment platform Snowball Finance this month.
The research collected the responses of 13,113 investors and industry professionals, of whom 12,398 were retail investors and 350 institutional investors.
For those who have yet to invest in ETFs, lack of knowledge was the main problem, according to the report. More than 55 per cent of retail investors in this group cited this was the main reason they had been hesitant to invest in ETFs.
Of those who were familiar with ETFs, most only knew about broad-based ETFs and had little knowledge about sector, thematic, smart beta, and investment-style ETFs for strategic allocation.
The report’s authors called for industry participants to leverage social media to enhance investor education and urged fund managers and those in the distribution network to establish an information-sharing platform on ETF products.
Li Yimei, Beijing-based chief executive of China Asset Management, China’s largest ETF manager, told Ignites Asia in September that the growing role of third-party online distributors had provided a natural channel to engage with young investors and educate potential investors about ETFs.
Equities ETFs were the most popular ETF category among retail investors, with broad-based ETFs being the most popular equities strategy. More than 80 per cent of retail investors surveyed had invested in ETFs tracking major stock indices such as the CSI 300 and SSE 50.
Broad-based ETFs would probably remain the primary choice for retail investors, the report said, although they might also begin to show a preference towards thematic and smart beta strategies as well.
The report’s authors also concluded that if China had more niche offerings in the ETF space the market would attract more assets.
This might be beginning to happen. Issuers have submitted applications for seven “food and beverage” ETFs this year, and ChinaAMC is already raising initial assets for an ETF tracking companies in that sector.
The survey found that brand recognition was less of a factor for retail investors when choosing ETFs, with less than 40 per cent saying they would invest in a particular ETF because of the company name.
Zhang Bixuan, Beijing-based analyst for Jian Financial Information Technology Company, however, said that while investors do tend to pay less attention to company brands when investing in passive ETFs compared with active funds, the larger asset managers still had certain advantages.
*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.