• Financial Directions
• November 20, 2024

Bond ETF Size Doubles Since Beginning of the Year

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The year has seen a remarkable surge in index-based investments in the domestic market, particularly highlighting the growing prominence of bonds Exchange Traded Funds (ETFs). Recent statistics reveal that the total scale of bond ETFs has crossed the significant threshold of 160 billion yuan, marking a twofold increase since the beginning of the yearOver the last six years, the average annual growth rate of bond ETFs has soared to an impressive 83%, significantly outpacing the 48% growth rate of stock ETFs during the same periodFurthermore, the number of bond ETFs with scales exceeding 10 billion yuan has escalated from just two at the end of last year to five.

Experts attribute this rapid proliferation of the bond ETF market to a combination of various favorable factorsAccording to Tian Lihui, a finance professor at Nankai University, the substantial fluctuations in equity assets in recent years have made credit bond ETFs particularly attractive, especially to institutional clients such as banks

Chen Li, head of the research institute at Chuancai Securities, elaborates that the current bull market in bonds has created an optimal environment for bond ETFsInvestors have shown a growing interest in long-duration assets, resulting in a rapid expansion of long-duration interest rate bond ETFs.

On the regulatory front, the new "National Nine Policies" introduced in April this year have emphasized the establishment of a fast-track approval process for ETFs to enhance the development of index-based investmentsChen pointed out that the high transparency characteristic of interest rate bond index funds aligns well with institutional compliance requirements, adding that new bond ETFs have been categorized as investable assets in margin trading activitiesAdditionally, ongoing reforms aimed at reducing costs for public funds have positively influenced the advancement of passive fundsThe progressive enhancement of market-based pricing capabilities in the bond market has provided a solid foundation for the development of bond ETFs

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Regulatory bodies are actively promoting connectivity between the interbank market and the exchange market, as well as supporting the innovation of product developmentThese strategic initiatives collectively catalyze the remarkable growth of bond ETFs.

The unique characteristics of the products themselves are compelling an increasing amount of investmentIndustry insiders summarize the advantages of bond ETFs as "two highs, two lows, and one diversification." This translates to high liquidity, low management fees, high transparency, low investment thresholds, and diversified risk“Investors have the option to subscribe or redeem through the primary market or trade at any time in the secondary market, benefitting from the 'T+0' trading system,” Chen explainedThe risk diversification advantage of bond ETFs emerges from their typical strategy of replicating target indices to form their portfolio, which helps mitigate the impact of individual bond defaults.

Another distinct advantage of bond ETFs lies in their precise duration allocation and post-tax benefits

Tian highlighted that bond ETFs emphasize categorization based on bond types and durations, allowing investors to choose combinations of specific durations and varietiesImportantly, individual and institutional investors are exempt from income tax on dividends received from securities investment fundsPublic funds investing in bonds also enjoy a complete exemption from corporate income tax, providing them with a competitive edge over other asset management and proprietary institutions.

Despite the successful breakthrough of bond ETFs surpassing 160 billion yuan in scale, they still represent a relatively low proportion of the overall ETF market in the domestic landscapeThis phenomenon indicates that there remains ample growth opportunity for bond ETFs, akin to a fertile land yet to be fully cultivated, teeming with unlimited potentialChen perceives the current stage of bond ETFs as merely the beginning of their development, suggesting that more steps should be taken to enhance interaction between the interbank market and the exchange market, breaking down existing market segmentation to achieve broader market coverage

Only through these efforts can bond ETFs showcase their capabilities within a larger market arena, attracting more funding and facilitating sustained scale expansion.

Simultaneously, the current phase of bond ETF products in China is marked by relative singularity in types and formatsChen acknowledges that the key to developing bond ETF products lies in innovationHe advocates for institutions to proactively explore the creation of cross-market bond ETFs, leveraging the resource advantages of diverse markets to present investors with a wider array of investment optionsMoreover, there is a need to diversify duration and type coverage thoroughlyThis comprehensive approach would address variations across short-term, medium-term, and long-term dimensions, and encompass different types of bonds like government bonds, credit bonds, and convertible bonds to cater to various investor preferences regarding risk tolerance, investment horizons, and expected returns, thus establishing a diverse, multi-layered bond ETF product ecosystem.

As the concept of index-based investment gains increasing recognition among investors, ETFs are poised to play a more proactive role in attracting medium- to long-term capital into the market, serving the real economy, and meeting the wealth management needs of residents