Bond ETFs Fundraising Tops ¥100B

The financial landscape in China has been undergoing a remarkable transformation,particularly in the bond exchange-traded fund (ETF) market.As 2024 unfolds,the continued rise of a "bull market" in bonds has led to an impressive surge in the value of various bond ETF products.This expansion has resulted in the total market scale surpassing CNY 100 billion,which is a notable increase from CNY 80.15 billion at the end of Q4 2023.One notable success story in this realm is the recent emergence of the Bosera Convertible Bond ETF,which has also crossed the CNY 10 billion threshold,making it the fourth bond ETF to enter this "billion club."

Industry experts recognize that while the domestic bond ETF market is still in its infancy,its share remains relatively small compared to the staggering CNY 24 trillion of index bond mutual funds.However,the pressing issue of "asset scarcity" has led to an increasing demand for bond ETF allocations.

The bond ETF market’s momentum has gained traction recently,with the Bosera Convertible Bond ETF marking a significant milestone as the fourth fund to surpass the CNY 10 billion mark.Launched in March 2020,this fund is the first in the market to track an index specifically dedicated to convertible bonds.It tracks the China Securities Index for convertible and exchangeable bonds,comprising bonds listed on the Shanghai and Shenzhen stock exchanges.

Since February,the convertible bond market has exhibited impressive performance,with a cumulative increase of over 6% by the end of May.This surge has attracted a substantial influx of capital into the Bosera Convertible Bond ETF,which saw its assets grow by approximately CNY 4 billion—a remarkable growth rate of about 60%,reaching CNY 11.3 billion.Just a week prior,on June 18,the fund had just surpassed the CNY 10 billion mark.

While the success of the Bosera Convertible Bond ETF may stand out,it is part of a broader trend where several other bond ETFs have also reported rapid growth in their net asset values this year.Alongside the Bosera fund,three other bond ETFs—FTSE China Short-term Bond ETF,E Fund Government Bonds ETF,and Ping An Corporate Bonds ETF—have also surpassed the CNY 10 billion milestone,with their respective asset totals reaching CNY 25.79 billion,CNY 18.05 billion,and CNY 11.46 billion as of June 25.

The current bullish sentiment within the bond market and the sharp rise in interest rates have propelled the bond ETF market to a persistent expansion.According to data compiled by Wind,the bond ETF market reached CNY 108.33 billion as of June 25,demonstrating substantial increases over previous years,with figures of CNY 80.15 billion in 2023,CNY 52.93 billion in 2022,and CNY 23.82 billion in 2021.

Key contributors to the heightened demand for bond ETFs this year can be attributed to a combination of factors.Initially,the overall strength of the bond market has led to an increased interest in various bond products among investors.Moreover,bond ETFs offer distinct advantages; they feature significant liquidity,facilitate “T+0” trading,and maintain high transparency with relatively low fees and tax benefits.Furthermore,in an environment characterized by asset scarcity,institutional funds including wealth management and insurance companies are significantly ramping up their allocations to bond ETFs.

Amid this "asset scarcity," institutions are increasingly recognizing the need for extended-duration bond allocations.Yet,the current market lacks sufficient long-dated bond ETFs to cater to institutional demand.This void presents a compelling market opportunity for insurance companies,banks,asset managers,and other institutional investors.Additionally,private fund managers,high-net-worth clients,and brokerage firms with bond trading strategies also stand to benefit from integrating bond ETFs into their portfolios.

With institutional investors eagerly moving toward these funds,bond ETF trading has become remarkably active,characterized by high turnover rates.As of June 25,the average turnover for the flagship government bond ETF reached an extraordinary 48 times,while the five-year government financial bond ETF and the 30-year government bond ETF reported turnover rates of 84.88% and 55.22% respectively.

According to Mingming,Chief Economist at CITIC Securities,the prevailing bond bull market has heightened market sentiment to an extreme,prompting trading-driven funds to aggressively buy into this arena.Bond ETFs serve as convenient vehicles for this activity,particularly medium- to long-term interest rate bond ETFs and those focusing on high-quality credit bonds.

Despite the impressive growth of index bond funds now exceeding CNY 100 billion,the overall scale of China's bond ETFs remains relatively modest,highlighting substantial future potential for expansion and diversification within this market.

Currently,the growing index bond fund market consists of only ten asset management companies that have introduced twenty distinct bond ETFs,covering five primary categories: government bonds,government financial bonds,local government bonds,credit bonds,and convertible bonds.Notably,both interest rate bond ETFs and credit bond ETFs account for over CNY 80 billion of the total—an overwhelming 80% share.

The twenty bond ETFs introduced this year have all demonstrated positive returns.An analysis reveals that long-duration products have significantly outperformed their short-duration counterparts.The 30-year government bond ETF standout with an impressive return rate of 9.20%,far surpassing the next highest performer,the 10-year local government bond ETF at 5.67%.The government financial bonds ETF yielded a return of 4.05%,securing the third position.In contrast,amidst recent fluctuations in the convertible bond market,the convertible bond ETF's return rate dipped to 0.60%.

Since the end of last year,the share of the 30-year government bond ETF has shown a trend of steady upward volatility,suggesting that trade-driven investments are primarily capturing this growth.Meanwhile,investments driven by long-term allocations are likely fueling growth in the 10-year government bond ETF and the two applicable credit bond ETFs.

Numerous industry insiders have indicated that the mid- to long-term investment value of bond ETFs is becoming increasingly evident.An investment professional from an Eastern China public fund noted that with fewer varieties and smaller scales,bond ETFs currently represent less than 5% of the total index fund market.However,the bond ETF market is poised for considerable growth in both product variety and size,indicating strong long-term investment value.

Understanding the allure of bond ETFs as a financial instrument reflects a broader trend where investors seek diversified exposure and flexibility.With the capability to track a bond index,investors can participate in the primary market for subscriptions and redemptions or trade ETF shares on the secondary market.This method conveys a streamlined path toward comprehensive bond investment,especially in a low-risk yielding environment.The decline in traditional yield attractiveness has driven many investors to consider strategic trading to enhance their returns.Bond ETFs offer the ability to trade in real-time while also providing cash redemption options,thus appealing to a range of clients with their risk diversification,investment flexibility,high liquidity,and cost-effective characteristics.

In conclusion,as we advance through the second quarter of 2024,the bond market rates are likely to revert to fundamental and policy-driven frameworks,which could result in a deceleration of growth for ultra-long duration ETFs.Nevertheless,the medium- and long-term interest rate bonds and credit bond ETFs continue to exhibit significant growth potential for the foreseeable future.