Investing in Global Assets with ETFs

The evolution of the Exchange-Traded Fund (ETF) market in China is a remarkable narrative that reflects broader trends in global financeOver the past two decades, what started as a niche investment vehicle has blossomed into a mainstream financial tool, pivotal for asset allocation strategies among investors across various sectorsThe rapid growth of China's ETF market has caught the attention of local and international investors alike, prompting a reevaluation of how these instruments can be leveraged for global asset allocation amid changing market dynamics.

On December 7, at the main venue of the 2024 Xueqiu Carnival, industry experts gathered to discuss the current landscape of ETFs worldwide and in ChinaThey assessed the latest trends and shared insights on how to utilize ETFs effectively for strategic asset allocation and investment opportunities in global markets.

Since the inception of ETFs in 1993, these investment vehicles have gained popularity for their inherent advantages—easy trading, transparent strategies, low fees, and diversified holdings

Lin Weibin, a renowned financial expert, highlighted that by mid-2023, the global ETF market had reached an impressive $12.7 trillion, with the Americas accounting for nearly $10 trillion of that totalThe United States alone represented a commanding share of around 70-80% of the market.

When focusing on China's domestic market, the growth trajectory of ETFs has been explosive over the past few yearsLin pointed out that it took 16 years for China's ETF market to reach its first trillion yuan in 2020. Remarkably, within the subsequent three years, the market surged past two trillion yuan, with projections indicating it could soon exceed four trillion yuan by the end of November 2024. Despite the rapid growth, Lin emphasized that over 90% of the current ETF offerings are equity-based, while options such as bonds, currencies, commodities, and multi-asset ETFs remain limited.

A notable trend identified in recent developments is the shift in investment strategies, as illustrated by third-quarter reports indicating that index-based holdings have surpassed those of actively managed funds

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This represents a significant turning point, with passive equity representation reaching 51% in China, a phenomenon that mirrors a trend observed in the United States four years ago.

Lin further elaborated on the potential for passive equity funds to expand in China, noting that as of the third quarter of 2024, passive funds accounted for only 3.8% of the market capitalization in the domestic stock marketIn contrast, the U.Smarket achieved a figure of 18.9% in 2020, suggesting that there is still significant room for growth.

“It's essential not to underestimate the profound impact that the rapid growth of the ETF market has on investors’ styles and market behavior,” Lin stressedHe attributed this change mainly to the accessibility of ETFs, which attract many individual investors who may struggle to meet the investment qualifications for trading in specific sectors, such as the Sci-Tech Innovation Board or the ChiNext Board

With ETFs, investors face lower barriers to entry while still gaining access to diverse investments.

Additionally, the complexity of stock selection deters many from directly investing in equitiesFor most individuals, investing should serve their lifestyle rather than dictate itAs a result, ETFs have become a preferred vehicle for trading, with increasing numbers of investors opting to engage in transactions through these funds.

Lin also highlighted that significant inflows into ETFs would enhance the correlation among the underlying stocks in an index, complicating the selection process for savvy investorsThis is particularly evident as more foreign investments flow into Chinese stock markets, representing a shift in behavior since the market fluctuations noted on September 24.

As the discussion evolved towards global investing through ETFs, Lin explained the relationship between globalization and resource allocation

He pointed out that an effective asset allocation strategy encompasses a layered approach, focusing on asset types followed by geographical considerations.

In today’s highly competitive fund management environment, characterized by product commoditization, Lin emphasized that the core competitive edge of index funds, including ETFs, is their low-cost structureWith management fees for broad-based ETFs now as low as 0.15%, investors can minimize costs while still pursuing potential outperformance against the indices they track.

Lin explained that the ETF market is not just about low fees; it also relies on close collaboration with market makers, private equity, and Qualified Foreign Institutional Investors (QFIIs), all aimed at enhancing trading activity and reducing transaction costs

Additionally, the provision of research and investment services plays a crucial role in improving the overall investor experience.

Summarizing his insights, Lin reiterated that the combination of strategic products, meticulous management, active trading, and pro bono research initiatives inherently supports a low-cost model that benefits a broader array of investors, making investing more inclusive.

From the perspective of asset allocation, diversification is often referred to as a 'free lunch' in investingThe low correlation among major asset classes globally, coupled with evident rotation, renders the pursuit of asset allocation both necessary and feasibleLin shared common and practical asset allocation models and acknowledged that while the variety of ETF products in China is still evolving, there are sufficiently adequate options to support effective global investment strategies.