Passive products such as Exchange Traded Funds (ETFs) in China have posted a record performance in 2018 and the first quarter of 2019, according to financial research specialists Cerulli Associates.
During these 18 months, ETFs—excluding money market ETFs—saw their assets surge by 84.1% to hit RMB412.6bn ($61.5bn). Index funds, including index-listed open-end funds (LOFs), grew at a similar rate of 83.4% to RMB220bn.
ETFs, which account for around 65% of passive assets, also attracted record-high inflows last year, at RMB189.6bn, mostly due to inflows to equity ETFs in late 2018. At the end of March 2019, equity ETFs took 94.6% of total ETF assets, or 61.7% of total passive assets, Cerulli said. Traditional broad-based index ETFs, which are a subset of equity ETFs, make up most ETF assets in China, accounting for more than 60% of the total.
However, many products with new themes and strategies have emerged in recent years. Among them are state-owned enterprise (SOE) reform ETFs, the main contributors to thematic ETFs' assets. Such products are targeted mainly at SOEs and institutional investors, and are designed to support SOE reforms.
Miao Hui, senior analyst with Cerulli Associates, said: "There is ample room for fund managers to explore areas such as further industry segmentation; new technology or economy themes; environmental, social, and governance; multi-factor smart beta; and overseas exposure. There is also potential to expand bond and commodity ETF offerings, which are still limited and lack diversity.
"Innovation will be essential for small and mid-sized managers and new entrants to win meaningful market shares."
Measures by China's SEBI to reduce the costs of mutual fund investments for retail investors have also encouraged managers to promote AIFs, as they seek alternative sources of revenues. AIFs' flexibility in charging fees makes these funds an attractive proposition for managers looking to boost their revenues.
Despite the positive performance seen in passive funds, ETF investing could still be regarded more as a trading activity, rather than as long-term investments in China, Cerulli report states. Nevertheless, there may be no better time than now to promote passive products in China, as "investors' awareness of such products has been raised by market movements and managers' consistent efforts to educate investors," Cerulli said.