Exchange Traded Funds (ETFs) have become a pivotal investment tool in the Chinese mainland's financial landscape over the past two decades. On July 22, 2022, a significant milestone was achieved when 141 mainland-listed ETFs and 10 Hong Kong-listed ETFs were included in the mainland-Hong Kong stock connect.
With the 2024 revised implementation rules of the Shanghai/Shenzhen-Hong Kong stock connect, the three stock exchanges recently updated their lists of tradable ETFs, marking another major upgrade to the \"stock connect\" program. This enhancement is set to boost market participation and efficiency, making it easier for investors to navigate cross-border investments.
ETFs are favored for their low costs and risk-minimizing nature, appealing to both long-term, risk-averse investors and short-term traders. Mainland investors can now access a broader market without the need to individually handle thousands of A-shares or Hong Kong stocks, thanks to the expanded ETF offerings.
The recent increase in tradable ETFs introduces more industry-focused plays, including cloud computing, software, robotics, and rare metals. Notably, for the first time, enhanced ETFs with active management options have been introduced, providing investors with more strategies to outperform the market.
As of this week, there are 974 ETFs in the A-share market with a total capitalization of 2.65 trillion yuan ($364.31 billion). Data shows that over the past two years, 70 passive-managed index funds have outperformed, delivering returns ranging from 17.3% to 50.4%, compared to only nine active-managed open-end funds achieving similar results.
The timing for stepping up ETF trades is favorable, with the average price-to-earnings ratio in the segment decreasing to 20.08 from 28.1 two years ago. This presents profitable arbitrage opportunities for investors using ETFs to capitalize on mispriced funds or underlying stocks.
The expansion of ETF supply underscores China's commitment to its opening-up policy. By rolling out more measures to facilitate cross-border investments and trades, China is steadily integrating into the global financial markets, fulfilling its promises made upon joining the World Trade Organization 24 years ago.
Hong Kong continues to play a crucial role as a bridge between mainland markets and the rest of the world. Although the current stock connect covers about half of the A-share market, it accounts for 91% of the mainland market's total capitalization. The upgraded program through ETFs allows Hong Kong and foreign investors to deepen their presence in the mainland market, sharing in China's economic growth.
Additionally, the mainland market benefits from improved liquidity. The average daily turnover of the 782 stock ETFs reached 29.6 billion yuan, up from 16.5 billion yuan when ETFs were first included in the program. Although slightly below the January level of 36.4 billion yuan, this increase signals growing confidence among mainland investors.
Making 60% more ETFs tradable for Hong Kong and foreign investors is expected to drive future trade volumes. With six more Hong Kong or south-bound ETFs added, mainland demand for cross-border investment is on the rise, as evidenced by outbound ETF turnover accounting for 28.4% of total ETF trades since early 2024.
Reference(s):
Mainland-HK stock connect with more ETFs critical to financial world
cgtn.com
