In the world of finance, the rise of Exchange Traded Funds (ETFs) has been nothing short of monumentalAs we transition into 2024, the ETF landscape is rapidly evolving, likened to a majestic mythical creature soaring effortlessly through the winds of the investment marketWith the overall scale of the public fund industry witnessing explosive growth - soaring from a staggering 20 trillion yuan at the beginning of the year to over 37 trillion yuan today - ETFs are undeniably setting a new pace for investment vehicles.

The current climate reflects dynamic developments in public fund management, particularly given the downward trend in market interest rates

As funds begin to flow more freely within the market, the landscape is shifting towards passive investment strategies that prioritize ETFsThe total assets under management in public funds have now eclipsed 30 trillion yuan, marking a crucial threshold where passive index funds have begun to dominate over actively managed equity funds, solidifying the mantra within the industry: “those who possess ETFs control the market.”

Capital is drawn to the most lucrative opportunities, and as we peer into the possibilities of 2025, it becomes clear that this shift will persist, heralding the arrival of the “E” investment era.

An Unprecedented Surge: A New High for ETF Scale

Evidently, the public fund industry is experiencing intense activity, with ETF assets continuously climbing to unprecedented heights

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At the close of last year, total public fund assets rested at 27.6 trillion yuan; by February, this figure had surged by nearly 2 trillion yuan to 29.3 trillion yuan within just one monthApril marked another milestone when the sector surpassed the 30 trillion yuan mark, and by the end of May, it exceeded 31 trillion yuanAfter a few months of consolidating performance, September saw a remarkable swing upward, adding over a trillion yuan in a single month and officially crossing the 32 trillion yuan threshold for the first time.

According to reports from the China Securities Investment Fund Industry Association, by the end of October, total public fund assets had reached an impressive 31.51 trillion yuan.

With the continuous expansion of public fund scale, index funds play a pivotal role in driving this growth

The ETF market has particularly flourished; at the end of last year, the ETF scale stood at around 2 trillion yuan, and on December 22 of this year, it soared to a remarkable 3.74 trillion yuanDuring the peak of the market in the fourth quarter, theETF scale even surpassed 3.8 trillion yuan.

Exploring the historical development of ETFs shows a remarkable acceleration in growthIt took 16 years to grow from zero to one trillion yuanThe leap from one trillion to two trillion took about three years, while the step from two trillion to three trillion was achieved in a matter of mere months, currently scaling beyond 3.7 trillion yuan.

The increasing diversification of ETF products has drawn significant interest from institutional investors

In particular, over the past year, institutions such as Central Huijin have consistently increased their ETF holdings, while various insurance funds and private equity firms have also jumped on boardMoreover, the number of individual investors opening accounts to invest in ETFs has noticeably climbed, with many newcomers opting for ETFs as their preferred avenue for investment in A-shares and seizing market opportunities.

As a fundamental investment tool, index funds have gained substantial clout, reaching a historic turning pointAs of the end of the third quarter, passive index funds’ total market capitalization in A-shares has officially surpassed that of actively managed equity funds for the first timeAccording to estimates by Minsheng Securities, actively managed funds have faced net outflows for six consecutive quarters, while passive index funds have enjoyed net inflows during the same duration.

Beyond equity ETFs, the bond ETFs, which had long remained dormant, have seen a revival this year

By the end of 2023, the scale of bond ETFs reached 801.62 billion yuan, with projections that by December 20, it will have surged to 1.663 trillion yuanThe number of bond ETFs exceeding the 100-billion-yuan mark has also expanded from 2 to 5 in a remarkable leap forward.

The Surge of “E”: Fund Companies Enter the Arena

Looking ahead to 2024, both large and small fund firms are vying to capitalize on the burgeoning index fund windfall, with ETFs being the shining star that commands attention from numerous companiesMajor players in the ETF sector are focused on broadening their product lines, constructing more comprehensive ETF offerings encompassing various broad-based indices along with specialized thematic ETFs

Smaller fund companies, undeterred by the high costs, are also entering the fray actively; for instance, Tibet Dongcai Fund has launched multiple ETFs this year, while firms like Industrial Bank Fund and CICC Fund have resurrected ETF product filings after years of absence.

Given the highly competitive environment characterized by high levels of ETF product homogenization, it is evident that competition among fund companies is fierceRemarkably, over half of the companies have adopted a low-fee structure, charging only a “0.05% custody fee plus a 0.15% management fee.”

Zhao Yunyang, General Manager of the Index and Quantitative Investment Department at Bosera Fund, pointed out that ETF operations involve not only significant initial investments and ongoing maintenance costs, but also substantial marketing expenditures

Such financial considerations are pivotal for smaller fund companies contemplating the initiation of ETF businesses.

“The first mover advantage is crucial for ETFs, particularly for widely recognized strategic productsFor instance, the market consensus around the CSI A500, a rare broad-based product, makes competition particularly fierce,” stated Su Junjie, General Manager of the Quantitative and Derivatives Investment Department at Penghua Fund.

The Winds of “E”: Embracing the Investment Era

Reflecting on the global development of ETFs, index investing has solidified itself as a prevailing trend

The massive expansion of ETFs around the world is evident.

As reported by independent research firm ETFGI, by the end of November, the global ETF market had surged to $15.12 trillion, breaching the $15 trillion mark for the first timeIn contrast, the global ETF total was $11.63 trillion at the end of last yearNotably, net inflows into global ETFs in November reached a whopping $219.95 billion, marking 66 consecutive months of net inflows.

Industry insiders assert that the era of asset management tools has emerged in ChinaAccording to Xu Zhiyan, as the innovative landscape of ETFs continues to evolve, increased participation from institutional investors is on the horizon, potentially propelling ETF scales to reach between 8 trillion and 10 trillion yuan by 2035.

Zhao Yunyang predicts three key trends for the future of ETFs

Firstly, there will be a further concentration of scale towards broad-based ETFsReflecting on overseas trends, large ETFs such as the S&P 500 and total market ETFs in the United States have reached trillion-dollar valuations, indicating significant growth potential in China's smaller scale broad-based ETFsSecondly, there is considerable room for product innovation, with strategies such as downside protection using options and transparent actively managed ETFs experiencing rapid growth abroadLastly, the focus on niche technology sectors is expanding, with breakthrough technologies in artificial intelligence, humanoid robotics, and biotechnology offering promising opportunities for specialized tech ETFs.

In this evolving public fund industry, as market interest rates persist in their downward trend, the doors to a capital shift are wide open

As yields on 10-year government bonds dip below 2%, and as passive index funds overtake active equity funds, the principle of “doing nothing leads to results” associated with passive index funds has begun to resonate strongly with investors, guiding them towards this burgeoning direction.

Capital is naturally drawn to more lucrative avenuesPresently, China boasts over 1,000 ETF products, presenting a challenge for investors navigating their optionsFor institutional players, leveraging ETFs to assist investors in allocating major asset classes is critical moving forward.

Recently, Huaxia Fund released a report revealing a heightened demand among existing market participants for personalized investment services, particularly around tailored asset allocation strategies and timely market analysis.

According to research published by CITIC Securities, the steadily growing ETF market size has led to a trend of “redeeming actively managed funds and buying ETFs.” Since 2021, a prevailing decline in growth-style investments has seen actively managed products yield negative excess returns compared to ETFs, highlighting the superior cost-effectiveness of ETFs and propelling the diversification focus towards them

As ETF providers, public funds are increasingly exploring “advisory + ETF” and combination-based investment methods to elevate investor engagement.

“Employing broad-based ETFs as the core investment base, while supplementing with thematic ETFs for targeted exposure, often yields impressive portfolio outcomes,” notes Su JunjieObserving the evolution of international markets reveals a gradual shift in seller-service dynamics towards buyer-focused solutions, fostering an increased emphasis on asset allocation in the current investment environment.

Consequently, numerous leading fund companies have rolled out “advisory-driven” index investment strategies