Actively building the ETF market is an important measure for the Shanghai Stock Exchange to implement the spirit of the Central Financial Work Conference and the relevant requirements of the State Council's Guideline on Strengthening Supervision, Forestalling Risks and Promoting High-Quality Development of the Capital Market, and also an important starting point to better meet the people's growing demand for wealth management. Since the beginning of this year, domestic index-based investment has flourished. The total size of the ETF market exceeded RMB 2 trillion, and the market received continuous net inflows of capital. In the first half of the year, the ETF market continued to receive net inflows, with a capital scale of RMB 461.7 billion and a total turnover of RMB 14.7 trillion. Among them, the net inflow of ETFs into the Shanghai Stock Exchange was RMB 352.8 billion, with a total turnover of RMB 11.8 trillion. The average daily turnover exceeded RMB 100 billion, and the trading activity reached a higher level, ranking first in Asia. A few days ago, the Shanghai Stock Exchange compiled and formed a White Paper on ETF Investment Trading based on the situation of the ETF market in the first half of 2024, which comprehensively displays the development of the ETF market, trading activity, trading mechanism, and other aspects. In general, with the continuous enrichment of product layout and the continuous optimization of supporting mechanisms, ETFs have increasingly become high-quality tools for investors to allocate assets. The participation of medium and long-term capital has increased significantly, and a benign market ecology is gradually taking shape.
I. Overall Liquidity of the ETF Market
The number of investors in the ETF market continued to grow. In recent years, the concept of index-based investment has been increasingly recognized by investors. ETF products have become an important tool for residents' asset allocation with their advantages such as transparency, low rates, and convenient transactions, further giving full play to the attributes of inclusive finance. By the end of June 2024, there were 6.58 million ETF holders in the Shanghai Stock Exchange (unpenetrated feeder funds), an increase of 61% over the end of 2020. Among them, institutional investors in the Shanghai ETF market held RMB 1.3 trillion, accounting for more than 70%, with a 7 percentage point increase from the end of 2023 and a 31.8% increase in position size.
Transaction activity rose to a higher level. In the first half of 2024, the trading activity in the domestic ETF market reached a new level, with total turnover reaching RMB 14.7 trillion and that of non-currency ETFs reaching RMB 11.5 trillion, both hitting record highs year on year. Among them, the overall turnover of ETFs in the Shanghai Stock Exchange was RMB 11.8 trillion, with an average daily turnover of RMB 100.8 billion, up 12.6% over the same period last year; non-currency ETFs totaled RMB 8.7 trillion, with an average daily turnover of RMB 74.1 billion, up 24.3% from last year.
The liquidity of leading products continued to improve. Judging from the distribution of turnover, there were 23 products with an average daily turnover exceeding RMB 1 billion in the whole market (20 in the Shanghai Stock Exchange), of which 10 broad-based ETFs ranked first among all types. The turnover of top products such as CSI 300 Index ETF and SSE 50 ETF further increased, with 5 bond ETFs and 5 cross-border ETFs. There were four products with an average daily turnover exceeding RMB 5 billion, and the turnover of short-term financing ETFs and PFB ETFs reached new highs.
ETF dividends improved investors' sense of gain. In the first half of 2024, a total of 24 ETFs in the market paid dividends with a total amount of RMB 5.38 billion. Among them, 20 ETFs in the Shanghai Stock Exchange paid dividends in an amount of RMB 5.21 billion, mainly broad-based ETFs, dividend-themed ETFs, and bond ETFs. Meanwhile, the Shanghai Stock Exchange has guided the establishment of a stable dividend mechanism and launched Morgan CSI A50ETF, the first quarterly mandatory dividend product, to improve the stability and predictability of dividends and help investors practice their long-term investment concept.
The deviation between ETF price and net value narrowed. In the first half of 2024, the deviation between ETF price and net value in the whole market narrowed. The average daily price deviation of ETF in the Shanghai Stock Exchange was RMB 0.0046, which continued to narrow compared with 2023. Regarding products, the deviation value of stock ETFs in the Shanghai Stock Exchange was the smallest, and that of broad-based index ETFs was only RMB 0.0006. The pricing level of bond ETFs improved the most, with the average deviation decreasing from 0.52% in 2023 to 0.08% and the deviation value decreasing from RMB 0.13 to RMB 0.05.
II. Trading Characteristics of Various Products
In the first half of 2024, the turnover of all types of non-currency ETFs increased. Stock ETFs still had the highest turnover, accounting for nearly 40%; bond ETFs had the highest single-product turnover, with an average daily turnover of nearly RMB 10 billion on top products; cross-border ETFs had the fastest growth in turnover, with the proportion increased from 16% to 19%.
Broad-based index ETFs attracted medium and long-term capital. Broad-based index ETFs continued to attract capital inflows, with an increase of 49% from the end of 2023 to RMB 1.24 trillion, including RMB 950.9 billion in the Shanghai Stock Exchange. The increase in broad-based index ETFs held by medium and long-term investors was significant. The involvement of medium- and long-term capital brought incremental capial into the ETF market and effectively improved the market's liquidity. The average daily turnover of broad-based index ETFs was RMB 31.6 billion, of which RMB 22.9 billion was done in the Shanghai Stock Exchange, an increase of 41% compared with 2023. The average daily turnover of top products exceeded RMB 4 billion.
The ETFs of central and state-owned enterprises performed excellently. By the end of June 2024, the total scale of domestic industry-themed ETFs exceeded RMB 500 billion, including RMB 341.5 billion in the Shanghai Stock Exchange and over 60% of individual investors' positions, making it the type with the highest proportion of individual positions among all kinds of ETFs. Regarding market performance, thematic ETFs from central and state-owned enterprises, banks, and energy-related industries performed well.
Bond ETF products worth tens of billions of RMB emerged. The scale of bond ETFs increased to RMB 109.9 billion, including RMB 91.2 billion in the Shanghai Stock Exchange, accounting for more than 80%, an increase of 68% from the end of 2023. The number of ten-billion-level products increased from one at the end of 2023 to four; the average daily turnover increased from RMB 14.7 billion to RMB 20.5 billion, and the average daily turnover of short-term financing ETFs and government finance bond ETFs exceeded RMB 6 billion. The position structure of institutional investors gradually diversified, the allocation of enterprise annuities was strengthened, and general pledge-style repo became an important strategy for institutional investors.
The turnover of dividend ETFs more than doubled. In the first half of 2024, strategic ETFs represented by dividend ETFs were favored by investors, with a total scale of more than RMB 70 billion. Institutional positions accounted for more than half. Insurance institutions were among the top ten holders of leading products in the second quarter of 2024. Among them, the scale of dividend-themed ETFs in the Shanghai Stock Exchange increased by more than 56% to RMB 56.7 billion, and the turnover increased by over 120%.
III. Capital Flow of ETFs in the Shanghai Stock Exchange
Net capital inflows for three consecutive years. In the first half of 2024, domestic non-currency ETFs received a net inflow of RMB 461.7 billion, accounting for 80% of the annual net inflow in 2023. The net inflow of non-currency ETFs in the Shanghai Stock Exchange was RMB 352.8 billion. In recent years, ETFs have continued to receive net capital inflows, and the amount of net capital inflows has increased yearly. The cumulative net capital inflows have exceeded RMB 1.5 trillion since 2021.
All kinds of ETFs received increased capital holdings. In the first half of 2024, all kinds of non-currency ETFs showed net inflows. Among them, stock ETFs continued the trend in 2023, with a net inflow of RMB 388.6 billion; The bond ETFs received a net inflow of RMB 23.4 billion, reaching the level of 2023; The net inflow rate of commodity ETFs and strategic ETFs has increased significantly, with the half-year net inflow reaching 3.5 times and 2 times that of 2023 respectively.
Mainstream broad-based ETFs have the largest net inflow. Among the top 10 ETFs with net inflow, there were 8 broad-based ETFs, 1 bond ETF (PFB ETF) and 1 gold ETF. The STAR ETF also continues to receive net inflows from institutions, continuing the previous trend of net inflows. Since 2022, its total net inflows have exceeded RMB 100 billion, and the transaction activity has also increased significantly, with the average daily turnover increasing by three times.
IV. Fund Market Making
The coverage rate of market makers for ETFs in the Shanghai Stock Exchange was high. By the end of June 2024, there were 33 market makers in the fund market of the Shanghai Stock Exchange, including 19 primary market makers and 14 general market makers. There were 557 ETFs with market makers, accounting for 98% of ETF products in Shanghai Stock Exchange, marking an increase of 33 from the end of 2023. In the first half of 2024, the transaction amount of market makers accounted for 29% of the total transaction amount of all market-making products, with the activity level of market makers increasing year by year, marking a year-on-year increase of about 3% compared with the transaction amount in 2023.
ETFs in the Shanghai Stock Exchange are equipped with a number of market makers to provide liquidity services. The average number of market makers equipped for ETFs in Shanghai Stock Exchange was 6.52. The CSI 1000 Index ETF and Huaxia CSI 300 Index ETF have the largest number of market makers, each with 23 market makers. A total of 10 market makers covered more than 100 ETF products in Shanghai Stock Exchange. The product coverage of the top five market makers was 56%, and that of the top ten market makers was 84%, indicating a high concentration of ETF market-making business.
The market-making function of ETFs in Shanghai Stock Exchange played a good role. First, the market-making mechanism effectively improved the trading activity of products. In the first half of 2024, the average daily turnover rate of products with market makers was 4.9 times that of products without market makers, facilitating investors' trading. Second, the market-making mechanism narrowed the relative bid-ask spread of funds and improved pricing efficiency. The average relative bid-ask spread of ETFs without market makers was 0.144%, while that of ETFs with market makers was only 0.1002%. Third, the market-making mechanism helped maintain the stability of fund prices and reduce price impact costs. The buying impact cost of ETFs in Shanghai Stock Exchange without market makers was 0.87% and the selling impact cost was 1.35%, while that of ETFs in Shanghai Stock Exchange with market makers was 0.07% and 0.07% respectively.
V. Outlook
According to the State Council's Guideline on Strengthening Supervision, Forestalling Risks and Promoting High-Quality Development of the Capital Market, we should vigorously develop equity public funds, greatly increase the proportion of such funds, establish a fast approval channel for exchange traded funds (ETFs), and promote the development of index-based investment. As the concept of index-based investment has been recognized by more and more investors in recent years, ETFs are expected to play a more active role in attracting medium- and long-term capital into the market, serving the real economy, and meeting residents' wealth management needs. In the next step, the Shanghai Stock Exchange will conscientiously implement the decisions and deployment of the CPC Central Committee and the relevant requirements of the State Council's Guideline on Strengthening Supervision, Forestalling Risks and Promoting High-Quality Development of the Capital Market to continuously enrich ETF varieties, optimize ETF supporting mechanisms, cultivate a good ecosystem for ETFs, and promote the high-quality development of the fund market under the overall guidance of the China Securities Regulatory Commission (CSRC).
