"The Shanghai Stock Exchange (SSE) has defined year 2010 as 'the year for business innovation on China's capital market', and its main task of innovation is to promote the exchange-traded funds (ETFs)," said President Zhang Yujun of the SSE at the recent SSE Seminar on ETF Innovation. According to Zhang, the SSE will introduce more than 10 ETFs this year, among which the SSE Mid-cap ETF will be one of the most important products to be promoted by the SSE.
The SSE hopes that the participants at the meeting, including banks, securities dealers, insurance companies and other parties, will vigorously develop their ETF business. Zhang made an all-round analysis on the history of rapid development of overseas ETFs as well as the great prospect for their development in China. "ETF was born 17 years ago, but it has now become one of the fastest-growing products on the mature markets globally," said Zhang. The market capitalization of ETFs, valued at US$0.8 billion in 1993 when it came into being, outnumbered US$1 trillion at the end of 2009. New York Stock Exchange boasts over 1,000 listed ETFs while the Standard & Poor's 500 ETF enjoys the largest market capitalization of more than US$100 billion.
Zhang believes that from the global trend, there is ample room for development of ETF business on China's market. He said that the ETF business had developed quickly in recent years as the SSE had done a lot of work on promotion of ETFs. In 2009, the number of ETFs was 5, adding 2 to the previous 3 products. This year, the SSE will issue more ETFs. By the end of 2009, the total market capitalization of the 5 ETFs on the SSE had reached RMB44 billion.
Why is the ETF so popular? Zhang attributed its popularity to its four distinct advantages: (1) standardization of wealth management; (2) higher transparency of management thanks to standardization, thus avoiding moral hazard; (3) huge savings of management expense due to standardized management, the reason why trading charges and management fees of ETFs are the lowest in the world compared with other products; (4) one of the few products on the market with higher returns from a long run, which is worth holding long by investors who have a general knowledge about the index fund.
According to the analysis of Zhang, the performance of both domestic and overseas indices is brilliant. On China's capital market, the index grows over 10 times from more than a decade ago. The SSE Composite Index closed at 333 points at the end of July in 1994 and now it reaches 3000 points, or up to more than 9 times. Meanwhile, the SZSE Component Index rises about 11 times from 1010 to 12000 points. In 2005, the SZSE 100 Index grows over 3 times from 975 to 4142 points.
E Fund Management Co., Ltd. (E Fund) introduced at the seminar the forthcoming issue of the SSE Mid-cap ETF. It is learnt that the ETF, consisting of 130 constituent stocks of the SSE 180 Index after removing 50 constituent stocks of the SSE 50 Index from it, has comprehensively reflected the overall situation of the mid-cap companies on the SSE. The selection is based on the ranking of the constituent stocks according to their market capitalization, turnover as well as the weight of floating market capitalization of each industry. December 31, 2003 is the base day of the SSE Mid-cap Index, whose base point is 1000.
Constituent stocks of the SSE Mid-cap Index, well-selected by the SSE through China Securities Index Co., Ltd., are 130 medium-sized enterprises with high growth potential. Representing the new mode of economic growth in China, they are the backbone enterprises indispensable to the securities market.
It is estimated by E Fund that from 2004 to 2009, the SSE Mid-cap Index enjoys the highest yield rate of 229%, or one-fold excess return compared with the SSE Composite Index, among the comparable indices on the Shanghai and Shenzhen markets.