The year 2024 marks a significant turning point for Exchange-Traded Funds (ETFs), which have experienced remarkable growth over the past two decadesSuddenly, it seems, these investment vehicles have transformed the landscape of the capital marketsAs of now, there are over a thousand ETFs in circulation, with total assets soaring to approximately 3.7 trillion yuanInterestingly, the assets held within ETFs have outstripped those managed by actively-managed funds for the first time, reflecting a seismic shift in investor confidence and preferences.

Investors are increasingly drawn to ETFs, attracted by their inherent characteristics: they are cost-effective, exhibit high liquidity, and offer useful tools for investment diversificationHowever, as the ETF market expands at an accelerated pace, one pressing issue has become painfully apparent: product homogeneityAs more ETFs targeting popular indices and sectors flood the market, investors find themselves grappling with "choice anxiety." A case in point is the CSI A500 Index, which was launched in September last year; as of January 17, the number of funds related to this index exceeded 110, with a collective asset size surpassing 350 billion yuan, and over 60 fund management companies participating in this crowded space.

Given this hyper-competitive environment, how can fund companies differentiate themselves in product design, promotion, management, and operations? Several prominent firms, including China Asset Management, GF Fund Management, and E Fund Management, have already rolled out ETF and index mini-programsThese are designed to offer comprehensive ETF services and enhance user experienceThe industry is increasingly aware of the severity of the issue at hand, and the management and service of ETFs need a more refined approach moving forward.

A growing concern within the ETF landscape is that the sheer number of indices being created has led to an oversaturation of products aimed at tracking them

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This has ignited fierce competition among similar offerings, with many fund companies recognizing the need for precise management and differentiation to remain relevant.

For companies such as Morgan Asset Management, addressing the complexity of ETFs requires ongoing innovation and institutional support at every level of the investment chainAccording to the Index and Quantitative Investment team at Morgan, managing ETFs necessitates a robust framework that encompasses all facets of its lifecycle—from trading and operational risks to rigorous quality controlsThe firm emphasizes the importance of collaborating closely with external entities like market makers and institutional investors to cultivate a healthy ETF ecosystem.

To this end, Morgan’s strategy places investor protection at the forefront, ensuring that operational capabilities are continually refined across systematic processes, including institutional framework, system development, and personnel trainingAdditionally, the introduction of overseas investors and market makers into the existing ETF mix is intended to expand clientele and enhance the investor compositionBy adopting an "internal and external" approach, Morgan aims to bolster the sustainability of its ETF offerings.

Details about the management of specific products were also disclosed by Morgan Asset ManagementThe initial investment phase must be carefully navigated by accounting for liquidity and potential impact costsDuring the ongoing management phase of an ETF, variances in weighting based on various factors necessitate a delicate balance involving both cost and tracking errors while ensuring dividends from underlying assets are tracked and rebalanced as necessary.

Competitive challenges abound, with institutional factors and management costs contributing to the strain on fund companiesFor instance, the operational costs of ETFs can be substantial, as a solidly-performing fund requires ongoing investment to maintain scale and liquidity

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Guotai Fund Management has acknowledged that this competitive arena is heating up and that traditional categories such as broad-based and sector ETFs are now overcrowded, demanding fresh strategies for differentiationIn addition to securing initial market advantage, Guotai is boosting its resource allocation towards product management, marketing strategies, and building dedicated sales teams to develop its ETF offerings.

Haifutong Fund further emphasizes a systematized approach to ETF investment, implementing mechanisms for monitoring corporate actions on included stocks and adopting a real-time tracking methodTheir philosophy centers around the concept of tightly matching indexed performance to deliver the least tracking error, which they recognize as essential for passive investment products like ETFs that provide investors with the mechanics for achieving specific risk exposureThey also continue to explore low-risk alpha strategies within the A-share market, such as new-issue investments and index futures arbitrage.

Particularly in the fixed-income sphere, Haifutong is focusing on enhancing their bond ETFs with multiple debt categories, such as interest rate bonds, credit bonds, and convertible bondsFor example, their latest offering, the Shanghai Stock Exchange Benchmark Market-making Corporate Bond ETF, employs a sampling replication strategy to ensure risk-return profiles closely track the index.

As index-based investment solidifies its role as a critical entry point for investors, firms are increasingly prioritizing the establishment of robust passive investment client service systemsGuotai Fund’s quant team recognizes the importance of targeting “true demand,” which could manifest as either allocation or trading requirementsAchieving a deep understanding of real investor needs is crucial for supporting long-term commitment to ETFs.

In practice, Guotai Fund categorizes its diverse investor base to better tailor services to their respective demands

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Individual investors currently represent a significant source of ETF liquidity and growth, particularly for smaller-scale ETFsFurthermore, institutional investors are classified into various types for specialized service agreements depending on their business models.

From a professionalism standpoint, Haifutong has created efficient communication pathways for investor interaction, supplemented by weekly ETF research reportsTheir investment team actively monitors key policies, macroeconomic data, industry shifts, and capital movements impacting the market, exemplifying a commitment to transparency and informed decision-making.

Recognizing the emotional toll that market volatility can take on investors, Haifutong emphasizes the importance of a supportive presence guiding clients in their investment journeysDuring tumultuous times, they engage in various outreach efforts to alleviate anxieties and ensure that clients are not swayed by irrational emotional responses.

As part of their growth strategy, Morgan Asset Management is developing a mature ETF operation system focused on enhanced client interaction, increased broker market-making capabilities, and product designThey are introducing unique quarterly dividend mechanisms across multiple funds, benefiting clients with predictable cash flows while encouraging long-term investment practices.

With several fund companies now utilizing ETF and index mini-programs, the industry is on the cusp of a revolution aimed at enhancing overall user experienceThe introduction of such service infrastructure is expected to facilitate better engagement with clients, allowing for tighter integration of information and strategic service offerings.

Looking ahead, many institutions agree that innovation will play a central role in the ETF’s evolution, requiring an escalated focus on product differentiationGuotai Fund suggests that future developments will likely hinge on innovations within the fund industry, especially given the saturated nature of current broad-based and industry ETFs.

They see opportunities in expanding resources allocated to building skilled ETF management teams, further enhancing sales promotion efforts, and refining precision management techniques

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