Bond ETFs Hit 100B Yuan Inflows This Year

The year 2024 has been marked by an impressive rise in the popularity of bond exchange-traded funds (ETFs) in China, as the current bond market is witnessing a significant "bull market" phenomenon. This unprecedented surge has led to the net asset values of various bond ETFs soaring, with the overall market valuation surpassing the monumental threshold of 100 billion yuan, a considerable leap from the 80.15 billion yuan recorded at the end of the fourth quarter of 2023. Among the noteworthy achievements is the recent milestone reached by the Bosera Convertible Bond ETF, which has now crossed the crucial mark of 10 billion yuan, making it the fourth ETF to join the elite "ten billion club."

Industry insiders have observed that although China’s bond ETF market is still in its nascent stages and its size pales in comparison to that of the index bond fund market, which boasted an impressive scale of 24 trillion yuan, the demand for bond ETFs is poised to grow steadily under the current "asset shortage" climate.

As of June 18th, a significant development unfolded in the bond ETF sector with the Bosera Convertible Bond ETF surpassing the 10 billion yuan threshold for the first time. Launched in March 2020, this particular fund was touted as the first ETF specifically designed to track indices associated with convertible bonds, incorporating a diverse range of bonds admitted by the Shanghai and Shenzhen stock exchanges.

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The convertible bond market has been on a positive trajectory since February, with the Zhongzheng Convertible Bond Index registering a cumulative increase of over 6% as of the end of May. Taking advantage of this encouraging market performance, the Bosera Convertible Bond ETF has attracted a wave of investments. By June 25th, its growth for the year reached approximately 4 billion yuan, marking a remarkable increase of around 60% and bringing its total size to 11.30 billion yuan. Just a week prior, the fund had only recently breached the 10 billion mark.

This milestone serves as a testament to the rapid expansion seen within the index bond fund market overall, as several other bond ETF products have likewise seen their unit net values and share quantities rapidly climbing this year. For example, the other three ETFs that have remarkably exceeded 10 billion yuan in size include the Futu Zhongzheng Short-term Bond ETF, the Fuguo Government Bond ETF, and the Ping An Company Bond ETF—all of which are continuing to increase in scale, reaching as of June 25th, 25.79 billion yuan, 18.05 billion yuan, and 11.46 billion yuan, respectively.

The performance of the bond ETF market is largely fueled by the current "bull market" for bonds, which has catalyzed rapid growth. According to data from Wind, as of June 25th, the bond ETF market has ballooned to a staggering 108.33 billion yuan. Comparatively, the market sizes in previous years were significantly smaller, peaking at 80.15 billion yuan in 2023, 52.93 billion yuan in 2022, and 23.81 billion yuan in 2021.

Industry experts attribute the expansive growth in bond ETFs this year to various contributing factors. The overall improvement in bond market conditions has led to a marked rise in investor interest across different types of bond securities. Furthermore, bond ETFs boast significant advantages, acting as effective investment tools characterized by features such as T+0 trading, high transparency, low fees, and favorable tax treatments. In the backdrop of an "asset shortage," financial institutions such as wealth management and insurance entities are ramping up their allocations towards bond ETFs.

On one front, the “asset shortage” scenario has heightened the demand from institutions for long-term bonds; however, the current market is lacking in long-duration bond ETFs, rendering these instruments increasingly appealing to insurance firms, bank wealth management divisions, securities firms' asset management companies, and their proprietary trading units. Additionally, there’s also interest from private equity firms, high-net-worth clients, and certain securities proprietary trading functions that have a demand for bond trading.

The vigorous allocation of institutional funds has resulted in robust trading activity within bond ETF products this year, with the turnover rates standing out compared to other index-type bond funds. By June 25th, the average turnover rate for the benchmark national treasury bond ETF was an impressive 48 times, while the five-year government financial bonds and the 30-year treasury bond ETF recorded turnover rates of 84.88% and 55.22%, respectively.

The chief economist at CITIC Securities, Ming Ming, pointed out that the prevailing "bull market" has heightened the market sentiment to its peak. A surge of trading funds has been actively purchasing bonds, with bond ETFs serving as the most convenient investment tools available. It is anticipated that ETFs holding 7 to 10-year treasury and high-credit-quality corporate bonds will continue to be favored asset categories.

While the index bond fund market's overall valuation has surpassed 100 billion yuan, the total scale of China's bond ETFs remains relatively small, indicating there are substantial opportunities for further growth and diversification in the future.

Currently, in a bond ETF market that has cleared the milestone of 100 billion yuan, only ten fund management companies have launched a total of 20 bond ETF products, covering five major categories: government bonds, government financial bonds, local government bonds, credit bonds, and convertible bonds. Notably, the existing stock of interest rate and credit bond ETFs constitutes over 80 billion yuan, accounting for 80% of the total volume.

In this year alone, all 20 bond ETF products have yielded returns, with long-duration products outshining their short-duration counterparts. The 30-year national treasury bond ETF is leading the pack with a return rate of 9.20%, followed by the 10-year local government bond ETF with a return of 5.67%, and the government financial bonds achieving a return of 4.05%. Additionally, amid the recent volatile dynamics within the convertible bonds market, the return rate for the convertible bond ETF has dipped to just 0.60% this year.

Since late last year, the 30-year treasury bond ETF has seen a consistent uptick in share growth, indicating a trend likely driven by trading funds. Ming explained that in comparison, the 10-year treasury bond ETF and certain credit bond ETFs may be drawing more interest from investors pursuing long-term strategies.

A multitude of professionals in the finance sector have remarked to reporters that the medium- to long-term fundamental value of bond ETFs is becoming increasingly apparent. A person from a public offering fund in East China remarked that the current selection of bond ETF products in China remains limited and their total scale is modest, with their share of total index-type funds falling below 5%. There’s considerable potential for the bond ETF market to expand in terms of both product variety and market size, leading to an optimistic outlook for continued growth in the future.

This outlook stems from the understanding that bond ETFs are designed to track bond indices, enabling investors to subscribe and redeem shares in the primary market while also affording them the option to trade on the secondary market. In a context where risk-free yields have diminished, many investors are shifting their focus towards active trading strategies for potential returns enhancement. Bond ETFs provide notable advantages, such as on-site T+0 trading capabilities, attractive liquidity, lower costs, and risk dispersion, which appeal to a broader selection of clients.

According to Ming, the second quarter will likely witness interest rate fluctuations in the bond market returning to traditional fundamentals and policy logic. While the motivation for institutional trading might slow down, it doesn’t negate the significant growth potential for medium- to long-term treasury and credit bond ETFs.