With a scale exceeding 500 billion, ETF development has entered a new stage and ushered in a new starting point. It is foreseeable that the fund industry will produce more and richer ETF products in the future. The ETF war is raging, the battle is undecided, and everyone involved has a chance.

Open-traded index funds (ETFs) are booming like never before. Equity ETFs are over 500 billion, and new ETFs have surpassed 100 billion this year. Fund companies have also made every effort to promote ETF layout. Whether it's leading companies that have established market shares or new entrants rubbing their hands, they see 500 billion as a starting point, and the war is raging.

The leading effect of ETF competition is beginning to show

Exploring innovative products is in full swing

Judging from the data, companies such as Huaxia, Nanfang, E-Fangda, Huatai Berry, Fuguo, Bosch, and Cathay Pacific are leading the way in terms of total ETFs. However, the ETF market is still changing, and there are still opportunities for every participant.

Zhao Fei, executive general manager of the China Finance Fund Index Investment Department, said that the scale effect and leading effect of ETFs in the broad-based index field have gradually become a reality. Currently, there are 35 fund companies that have issued ETF products, and the top ten managers collectively manage close to 90% of the ETF scale; at the target level, the single target, such as the Shanghai and Shenzhen 300 and the China Securities 500, has obvious leading effects, and competition is fierce. However, the overall competitive pattern has not yet finally taken shape. Taking the second half of 2018 as an example, all Shanghai and Shenzhen 300 and China Securities 500 ETF shares have increased, small and medium-sized products have also benefited, and industry development still has an inclusive effect.

Bosch Foundation said that it should be noted that the overall ETF cake is still relatively small. Many aspects such as product coverage, diversity, and specialization are in their infancy, and everyone is in the development stage.

To stand out from the competition, creating a unique breed is the key to victory. Commodity futures ETFs, index-enhanced ETFs, unique industry ETFs, and Smart Beta are all competitive directions for fund companies.

Xu Meng, director of Huaxia Fund's quantitative investment department, explained that their focus on innovation includes three categories: commodity futures, smart beta ETFs such as blue chip ETFs, growth generation ETFs, and 5G industry-themed ETFs.

Bosch Fund, on the other hand, said it wants to “take the lead” in important asset allocation tools, such as crude oil ETFs and other mainstream overseas market ETFs, to achieve the earliest layout.

Cathay Pacific and Southern Funds are paying more attention to the development of enhanced ETFs. China Southern Fund said that enhanced ETFs not only have the unique trading flexibility of ETFs, but also have the investment goals of index enhanced funds that strive to exceed index returns, can meet customer needs in a targeted manner, and are an important type of innovation.

Guangfa Fund, on the other hand, is more optimistic about Smart Beta products. “Based on the US market experience, large fund companies and ETF boutique management companies compete fiercely in the Smart Beta field. The supply of single-factor products in the US stock market is basically saturated, and major companies will continue to cultivate in the field of multi-factor indices. The application of factors to specific assets such as bonds and commodities is not widespread.”

ETF rate war intensifies

ETFs are getting a lot of attention, and rates are a focus. Many large public offerings have already joined the price war. People related to E-Fangda Fund believe that overseas asset management institutions, such as Pioneer, Fidelity, and BlackRock, have long launched low-rate index funds. Index funds and ETFs have a scale effect. The larger the management scale of fund managers, the lower the marginal management costs. In addition, the unit cost of index funds and ETFs is far lower than that of active funds; current management rates are strictly calculated by fund managers and can cover investment management and operating costs.

Xu Meng believes that in the long run, there is room for ETF management fees to fall. In the short term, it is difficult to systematically reduce ETF management fees. The reason is, 1. Domestic ETFs have not had a scale effect, and the cost of continuous operation of the ETF business is high. Even under current management rates, only ETFs from leading companies can make profits. Second, the average management rate for US ETFs is around 0.2%, and fund managers can also share interest income and investment advisory fees from some ETFs. As the scale of domestic ETF management increases and the business income of ETF managers diversifies, ETF managers will adjust ETF product rates according to the principle of marketization to cope with fierce market competition.

“At present, the domestic market does not have the conditions to cut all ETF products to the bottom.” Guangfa Fund said bluntly that, on the one hand, lowering index fund rates has basically become a trend; but on the other hand, domestic ETF rates are already in a relatively low position, making it difficult to reduce them. If the ETF market starts vicious competition, such as price wars, etc., the fee reduction is too large will also force most companies to operate at a loss.

Gao Gangjie, a high-dividend ETF fund manager at SPDB AXA Fund, said that it is difficult for any business that is not profitable to exist for a long time, and operating an ETF must bear the pressure of its high cost. Higher operating costs, on the one hand, require fund managers to improve their ability to integrate resources, invest and operate. On the other hand, they also need to increase overall ETF business revenue by providing more and better ETF products to expand the scale.

Product disputes are also strategic disputes

Lowering fees and strengthening innovation are still only one part of fund companies' layout of ETF products. Behind the product war, fund companies should come up with a strategic blueprint.

Judging from the current ETF development path, Huatai Berry Fund is quite typical. The size of the company's equity ETF surpassed 40 billion yuan at the end of the second quarter of this year, mainly due to the strategic deployment of Huatai Berry Fund. At the beginning of the company's establishment, the rising trend of ETFs in overseas markets was observed, and ETFs were one of the strategic directions of the company's development. The Shanghai Stock Exchange Dividend ETF was launched in 2006, and the first T+0 model Shanghai and Shenzhen 300 ETF was issued in 2012. These products have all become mainstream ETFs in the current market.

An industry insider said that ETF is a resource-intensive product, and the operation and management costs of fund companies are high, mainly including system costs, labor costs, issuance costs, market making costs, communication costs, sales costs, etc. Therefore, this ETF dispute is actually also a strategic dispute between fund companies, and requires increased investment in manpower, material resources, and financial resources to see results.

Moreover, this effort and investment is also long-term. “For individual fund companies, dealing with industry competition requires doing a solid job in every part of the ETF business. For example, when it comes to product design, we must be forward-looking and lay ahead of peers. The scale of distribution must take into account not only the company's costs but also the foundation for future cultivation. Liquidity must also be in place; communication and marketing must be carried out in depth and detail.” Cathay Pacific Foundation said.

Zhang Yuxiang, fund manager of the Quantification and Derivatives Investment Department of Penghua Fund, said that the overall scale of US ETFs experienced slow development and explosive development in the early stages; ETF products experienced the evolution of broad-based, industry-smart beta-ESG themes. China will also be in a similar situation. As time develops, companies and products with advantages of scale and characteristics will stand out and complete survival of the fittest.

“Regarding the layout of ETF products, fund companies should mainly consider whether they can provide investors with useful tools. The competition for fund products is whether investors can make money.” Wells Fargo Fund said.

“ETF competition is ultimately reflected in competition for the company's overall strength. Some fund companies may gradually withdraw from the ETF business in the future. Similar to the US market, the concentration of ETF business may continue to increase.” Xu Meng said.

Gao Gangjie, a high-dividend ETF fund manager at SPDB AXA Fund, said that many fund managers have issued ETF products, but in reality they have not fully adapted to ETF management, especially companies that have switched from actively managing the business circuit. ETFs place higher demands on fund companies' investment, research, products, marketing, sales, etc., and fund companies must improve themselves in all aspects to face a harsh competitive environment.