In the world of investment, the ability to adapt and evolve is essentialAs we venture into 2024, a new phenomenon is awakening within the public mutual fund industryThe rise of Exchange-Traded Funds (ETFs) is making waves, reminiscent of a soaring mythical beast, heralding a transformation that not only captivates fund managers but also reshapes investment strategies across the boardFrom the beginning of the year, the total assets managed by ETFs surged from 20 trillion RMB to an astounding 37 trillion RMB, underscoring a monumental shift in investor sentiment.

The dynamics of the mutual fund industry are being redefined, especially in a climate where interest rates continue to declineThe shift is tangible: the total size of the mutual fund market has surpassed 30 trillion RMB, marking an era wherein passive index funds are eclipsing their active counterparts, legitimizing the adage "He who holds the ETFs holds the world." The strategic insights drawn from this market transition are essential for understanding the broader implications for investors.

As capital flows towards higher yields, looking ahead to 2025, the urge for repositioning funds remains vigorous

Investors are moving into what can be termed the ‘E’ era of investment, where the trajectory of index funds suggests an unrelenting climbObservations indicate that the mutual fund industry has been on an upward trajectory this year, characterized by significant volatility but consistently hitting new highs.

The previous year concluded with the total mutual fund size standing at 27.6 trillion RMBBy February 2023, this figure had skyrocketed by nearly 2 trillion RMB in a single month to reach 29.3 trillion RMBApril witnessed the empowering moment when the mutual funds not only reached but exceeded the 30-trillion RMB mark, rising to over 31 trillion RMB by the end of MayAfter some fluctuation, in September, the market saw another leap of over a trillion RMB, with the overall mutual fund scale surpassing the impressive threshold of 32 trillion RMB.

The China Securities Investment Fund Industry Association recently disclosed that by the end of October, the total mutual fund size hit 31.51 trillion RMB

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Such exponential growth emphasizes the serious implications for investment strategies, primarily fueled by the ever-expanding index funds in the ETF sectorAccording to calculations from Choice, the ETF scale expanded rapidly from 2 trillion RMB at the end of the previous year to 3.74 trillion RMB by December 22 of this yearDuring the fourth quarter, the market reached an exhilarating peak, with ETF sizes briefly exceeding 3.8 trillion RMB.

The growth of ETFs has been a gradual evolutionFrom inception to crossing the first trillion RMB, it took 16 years; to reach 2 trillion RMB, just three years; but it took a mere few months to surge from 2 trillion to 3 trillion RMB, and now it stretches beyond 3.7 trillion RMBThis speed of growth reflects the shift in investment preferences among institutional and individual investors alike.

Notably, recent developments indicate an increasing appetite for ETFs among institutional investors

For instance, China’s Central Huijin Investment has been on a buying spree, further enhancing the advocates for ETFsAdditionally, many private equity firms have intensified their ETF investments, mirroring this trendNew accounts opened by individual investors show a clear preference for ETFs, favoring them as avenues to access the A-shares market and capitalize on investment opportunities.

The significance of index funds has never been more pronouncedReports from the most recent fund quarterly statements reveal that the market cap attributed to passive index funds has overtaken that of actively managed equity funds for the first timeData from Minsheng Securities suggests that actively managed funds have faced ongoing capital outflows for six successive quarters, in stark contrast to the consistent inflow of capital directed towards passive index funds during the same period.

Interestingly, not only have equity ETFs thrived, but bond ETFs, which have remained dormant for years, finally experienced a resurgence this year

By the end of 2023, the bond ETF scale is reported to have risen significantly, increasing from 801.62 billion RMB to an impressive 1.66 trillion RMB by December 20. The number of bond ETFs exceeding the 100-billion RMB threshold has transformed from two to five this year, showcasing an undeniable shift in market dynamics.

Amidst this environment, mutual fund companies, both large and small, are competing vigorously to capitalize on the growing ETF trend as we transition into 2024. Leading fund companies are keen to round out their offerings, developing a broader range of ETFs that cover various indices, including sector-specific themesSmaller companies are undeterred by the high costs associated with launching ETFs and have begun crafting their own products this yearNotable firms like Xizang Dongcai Fund have already launched multiple ETFs, with others such as Industrial Bank Fund resuming their ETF initiatives after years of silence.

This burgeoning competition has led to a landscape where ETF offerings are becoming increasingly similar, making the battle for market share more intense than ever

Over half of the fund companies have adopted a low-fee strategy, charging a mere 0.05% in trustee fees plus 0.15% in management feesZhao Yanyang, the General Manager of the Index and Quantitative Investment Department at Bosera Fund, highlights that while the operational costs for ETFs can be prohibitively high, particularly in marketing, these are crucial considerations for smaller firms venturing into the ETF space.

Fund companies are eager to capture the early-mover advantage for strategic products; this is particularly true for widely recognized indices like the China Securities A500. As competition for scarce ETF products intensifies, awareness and strategic positioning become paramountThe market's consensus gravitates towards these foundational ETFs, presenting ample opportunities for growth.

International market trends also provide critical insights into the fast-expanding landscape of index investing

Globally, the size of the ETF market reached an unprecedented 15.12 trillion USD by late November, solidifying its presence as a mainstream investment vehicleWith net inflows into global ETFs continuing for 66 consecutive months, it is clear that this trend is gaining momentum.

Specialists in the field argue that the era of asset management in China is transitioning towards a toolkit approachWith continuous innovation in ETF structures, the growing involvement of institutional investors is set to accelerate ETF growth, suggesting that by 2035, the size of ETFs could reach between 8 trillion to 10 trillion RMB.

Analysts forecast three overarching trends for the future of ETFsFirstly, there will be a heightened focus on broad-based ETFs, akin to the dominant S&P 500 ETF and other large-scale options available in the U.SCurrently, domestic broad-based ETFs appear relatively modest, implying a vast potential for expansion

Secondly, the scope for product innovation is enormous, with strategies like protective options and actively managed ETFs rapidly emerging in international marketsLastly, as breakthroughs in fields like artificial intelligence and biotechnology continue, specialized ETFs will present tremendous opportunities for investors.

As the mutual fund industry grapples with the reality of declining interest rates, the evolving landscape signifies a critical junctureWith a ten-year treasury yield dipping below 2%, the spotlight has shifted significantly to passive index fundsThey are outperforming many active funds, presenting profound implications for investment strategy directions.

Investors today face over a thousand different ETF products, leading to a complex decision-making process regarding the best investment avenuesFor institutional investors, utilizing ETFs to provide comprehensive asset allocation solutions is imperative as market conditions shift.

Research shows that on-the-ground investors aiming to invest in index funds have an increased demand for tailored services, exhibiting a yearning for personalized asset allocation strategies and periodic market analyses.

Since 2021, a marked trend has been noticed whereby investors redeeming actively managed funds are opting instead for ETFs, illustrating the shift in preference towards the cost-effective investment opportunities that ETFs offer

The public mutual fund sector, as a key provider of ETFs, is moving towards integrating advisory services with ETF offerings, signaling a new approach to enhance investor engagement.

In practice, employing broad-based ETFs as foundational investments while complementing them with sector-specific ETFs has proven to be a sound strategySu Junjie emphasizes that, drawing from experiences in international markets, the focus is gradually shifting from sell-side to buy-side services, underlining the growing importance of asset allocation in the investment sphere.

Several of the leading fund companies are already rolling out “advisory-style” index investment strategiesLi Yimei, General Manager of Huaxia Fund, highlights that in a landscape where “ETF plus advisory” is becoming the norm in wealth management, a shift is necessary from single product offerings to strategies built around investor portfolios