The Chinese Exchange-Traded Fund (ETF) market saw a remarkable surge in growth in 2024, punctuated by several significant milestones that marked a transformative year for this investment vehicleBy the end of September, the total value of ETFs surpassed an astonishing 30 trillion yuan, setting a new record in historyIt was a momentous achievement that showcased the growing confidence of investors in this sector.

Another noteworthy change occurred in mid-November when several major fund houses, including Huaxia Fund and E Fund, collectively decided to cut management fees for large, broad-based ETFsThis shift indicated a move towards a new era characterized by lower costs for investors, as passive index funds gained traction over their actively managed counterpartsFor the first time, the total market value held by passive index funds surpassed 3.16 trillion yuan, demonstrating a significant shift in investment strategies among Chinese investors.

The past year has witnessed a remarkable cumulative net inflow of nearly one trillion yuan into broad-based ETFs, with funds such as the CSI 300 ETF and the CSI A500 ETF leading the charge

This influx has played a vital role in channeling substantial capital into the A-share market, highlighting the growing importance of ETFs as a primary investment mechanism.

Among the numerous ETFs that dominated headlines in 2024, none garnered as much attention as the CSI A500 ETFIt successfully dethroned the CSI 300 ETF to become the ‘money magnet’ of the market, drawing in significant capital and investment interestHowever, this rise has not come without challengesThe A500 ETF, while attracting investors, faces the hurdles of homogenized competition and the inherent anxiety of scale within the public fund industry.

Industry insiders have pointed out that the similarities among products related to the A500 ETF, particularly in terms of design and fee structures, have led to fierce competitionFund managers are now compelled to allocate more resources toward marketing and promotional strategies to differentiate their offerings in a saturated market

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As fund sizes continue to expand, so too does the demand for sophisticated management capabilities, including meticulous control of tracking errors and optimization of dividend mechanismsEnhanced investor experience is regarded as a core competitive edge essential for success.

Since the start of 2024, broad-based ETFs have become the predominant avenue for institutional capital, cementing their role as a crucial source of incremental funds for the A-share market.

Statistical data from Industrial Securities reveals that, throughout 2024, equity ETFs enjoyed a cumulative net inflow of 1.01 trillion yuanNotably, broad-based ETFs contributed most of this capital, with a staggering one trillion yuan net inflow attributed to themWithin this category, the major players, namely the CSI 300 and CSI A500 ETFs, attracted an impressive net total of 767.5 billion yuan.

According to analysts, prior to October, substantial funds found their way into the CSI 300 ETF, leading to notable growth in index funds

However, following October, the CSI A500 ETF became the main attraction for investors, amassing a considerable net inflow of 215.5 billion yuan for the yearConcurrently, the Dual Innovation ETFs also attracted attention, with a net inflow of 69.8 billion yuan reported after September.

The growing appetite for the A500 ETF is attributed not only to market forces but also to regulatory encouragement and proactive strategies employed by fund companiesFollowing the launch of the CSI A500 index on September 23, 2024, numerous public fund institutions rushed to create and launch their own A500 ETF products.

As of December 31, 2024, there were a total of 24 A500 ETFs established in the public fund market, with an additional seven awaiting approvalHigh-profile offerings include the China International Capital Corporation (CICC) CSI A500 ETF and the Rongtuan CSI A500 ETF, which are currently in the issuance phase.

However, with the influx of new A500 ETFs, traditional favorites like the CSI 300 ETF and ChiNext ETF began to experience outflows in the first three quarters of 2024.

Detailed evaluations from Wind indicated that, between October 15 and December 31, ETFs such as the Guotai, Southern, and Huaxia CSI A500 ETFs attracted net inflows exceeding a hundred billion yuan each

The Guotai A500 ETF garnered a remarkable 26.5 billion yuan, while Southern and Huaxia followed with 20.96 billion yuan and 16.78 billion yuan respectively.

Conversely, during the same period, the Huatai-PB CSI 300 ETF and E Fund ChiNext ETF faced considerable losses, with net outflows totaling 46.27 billion yuan and 22.82 billion yuan respectively.

Experts within the industry believe that, relative to the CSI 300, which primarily represents the value sector, or the CSI 500 that signifies the growth sector, the A500 index excels in encompassing the industry leaders across diverse segments, rendering it more attractive to institutional capitalThis phenomenon of shifting preferences between previously popular broad-based ETFs and the CSI A500 ETF is, therefore, an expected outcome.

Fund companies aware of the hyper-competitive nature of similar products remain eager to secure a stake in the A500 market, recognizing that a vibrant market presents lucrative opportunities

Alongside ETF offerings, public institutions have launched A500 index funds and enhanced index funds in 2024.

As of year-end 2024, there are at least 70 approved index products tracking the A500 index, which include various ETF offeringsMany large fund managers are adopting simultaneous strategies to engage both exchange-traded and mutual fund domains.

Li Yiming, a senior analyst at Morningstar China, notes that traditional fund companies that possess advantages in active management may lean towards launching enhanced index funds to utilize their capabilities effectivelyMeanwhile, the primary players involved in A500 product issuance are predominantly mid to large-sized fund companies, reflecting their ability to withstand market turbulence and competition given the current economic climate.

This aggressive pursuit of market shares through varied A500 product types creates an intense need for differentiation to garner competitive advantage.

Although enthusiasm exists within public offerings, various factors often result in significant differences in scale post-launch among different A500 index funds.

Take for example the A500 ETFs that were capped at a specific issuance limit

The majority of these products reached the maximum size of 20 billion yuan upon establishment, but subsequent funds demonstrated significantly different success ratesAs of the last day of 2024, the Guotai A500 ETF, Southern A500 ETF, and Guangfa A500 ETF led the pack with asset net values of 28.15 billion yuan, 22.64 billion yuan, and 20.84 billion yuan respectively

Others that ranked from fourth to tenth include products from Huaxia, Huatai-PB, etc., whose net values ranged from 18.41 billion yuan to approximately 12.83 billion yuanNotably, the second batch of A500 ETFs saw significant growth despite being launched later.

Moreover, certain newly established A500 ETFs seem to have adopted a “less is more” approach regarding initial scaleFor instance, the Ping An A500 ETF and Xizang Dongcai A500 ETF, both intently launched on December 30, revealed launch sizes of only 1.51 billion yuan and 720 million yuan respectively.

Looking at the longer horizon, ETFs that successfully generate profit for investors will undeniably possess a sustainable future

However, early evaluations reveal that among the first ten A500 ETFs launched, only the Southern A500 ETF and Huatai-PB A500 ETF report positive returns since their inception.

According to Li Yiming, differences in net return rates from this batch of A500 ETFs could stem from their varying construction periods and the speeds at which fund managers executed their strategiesThe investment judgement exercised by fund managers inherently influences the rhythm of investments impacting fund performance.

Moreover, although these ETFs monitor the same index, the capabilities of fund managers in curtailing tracking errors ultimately affect the net value results.

Prominent analytical bodies indicate that as A500 ETFs grow rapidly, challenges arise around effective management, including maintaining tracking error control and liquidity provisionsJust as the pressure of investments bears weight, the swift scale of A500 ETFs also presents a shift in market dynamics.

As a result, the growth of the A500 ETF undeniably presents a substitution effect on other investment product types, with the leading CSI 300 ETF facing a notable decline in market share after October 2024. This disruption likely poses a threat to actively managed funds that missed opportunities within A500's rise.

Liu Siyuan, an analyst from Ji'an Jinxin Fund Evaluation Center, emphasizes that as the similarity between A500 products increases, and as competition heightens, managing these products requires intensive marketing investments and high managerial expertise for efficacy.

From a broader scale, continuous development of broad-based ETFs implies a significant reduction in management fees compared to actively managed funds