November 21, 2019 / 5:20 AM / 16 days ago

Competition intensifies in China's $100 billion, red-hot ETF market

SHANGHAI (Reuters) - China’s rapidly growing $100 billion market for exchange-traded funds is luring plenty of new entrants, intensifying competition in a market some predict will dethrone Japan to become Asia’s largest in five years.

TaiKang Asset Management launched its first exchange traded fund (ETF) this month, just weeks after Tianhong Asset Management, controlled by Jack Ma’s Ant Financial Group, made its foray into the ETF space.

The eye-catching ETF prospects in the world’s second-biggest economy have also enticed global ETF giant Vanguard, which formed an investment advisory venture with Ant in June.

ETFs, which are low-cost investment funds that typically track an index and trade like stocks on exchanges, have caught on in China as stock-picking active fund managers increasingly struggle to beat the benchmark indices. Individuals are also embracing ETFs to diversify risks.

“Retail investors in China are finding it more and more difficult to make money through trading individual stocks,” said Freddie Chen, a managing director at Vanguard, the U.S. pioneer in index investing.

“ETFs are also appealing to institutional investors as a handy tool for asset allocation,” he added.

According to fund consultancy Z-Ben Advisors, equity ETFs, the predominant form of ETFs in China, have almost doubled in size over the past year to exceed $70 billion. Assets of active equity and balanced funds rose only slightly.

Despite its rapid growth, China’s ETF market is still 10 years behind the U.S. and represents a small fraction of the $5 trillion global ETF assets, said Philippe El-Asmar, head of Asia Beta Strategies at J.P. Morgan Asset Management.

El-Asmar forecasts China’s $100 billion ETF market will grow to $500 billion in five years, dwarfing Japan’s $300 billion sector to become Asia’s biggest. Hua An Fund Management Co predicts the market will grow 10-fold in a decade.

Lured by the rosy prospects, more fund managers are jumping onto the bandwagon, with over 100 new ETF products awaiting regulatory approval.

“Our vision is to be China’s biggest provider of index funds,” said Yang Chao, vice head of index investing at Tianhong, which launched its first ETF in September.

The asset manager, best-known for fostering the world’s largest money market fund Yu’e Bao via internet platforms, aims to replicate the fund’s success in the ETF arena.

Jason Hsu, Chairman and CIO of Rayliant Global Advisors, said innovation is the key to success for new products.

“You don’t want to go to a price war with established players. You can’t win,” said Hsu, whose company has partnered with China Asset Management Co in designing so-called “Smart Beta” ETFs. Such ETFs seek to outperform the index using a rule-based system to exploit market inefficiencies, which Hsu said are still abundant in China.

J.P.Morgan’s El-Asmar said there was huge potential as such ‘Smart Beta’ funds account for 20% of the U.S. ETF market, whereas in China, the ratio is just 2%.

Editing by Vidya Ranganathan & Shri Navaratnam

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