How should individual investors go about investing?

In his letter to shareholders, stock market guru Warren Buffett stated that most investors will eventually discover that the best way to invest in securities is to buy low-cost index funds.

On December 19, 2007, Buffett made a bet on the Long Bets website, with a wager of $0.5 million.

In 2008, Buffett made a ten-year bet with Ted Seides, a hedge fund manager, on whether he could outperform index funds.

Ten years later, the five fully invested hedge funds selected by Ted Seides failed to beat the S&P 500, while Buffett's passive funds achieved an actual annual compound return of 7.1%, compared to Ted's five active funds with an annual compound return of 2.2%.

This bet tells us that hedge funds find it difficult to outperform an index fund that truly reflects the economic transition and development.

Recently, when discussing investments with senior colleagues at the company, one of them said, "The advantage of holding index funds is that if it's long-term capital, there are only two possible outcomes: either make some money after a certain period or make money in the end. The problem is that A-shares are a market for retail investors, and for most people, holding stocks for two months is considered long enough."

Investment is a game of time and human nature, where short-term attention should be given to market price signals, medium-term attention to the public and consensus, and long-term attention to patterns and frameworks.

For individual investors, it is very difficult to judge what will happen in the world in the medium term, given the limited individual cognition, experience, capital scale, and information asymmetry.

In such a situation, the optimal solution for individual investors is to pursue the market's beta, see where the incremental funds are, and what they are betting on, and then strive to get closer to the market's beta.

The ETF Investment and Trading White Paper (June 2024) released by Shenzhen Stock Exchange on September 13 contains a lot of information implied by various data.

01

ETF contributed 420 billion of incremental funds in the first half of the year.

As we all know, ETFs are one of the most important sources of incremental funds in the A-share market in the first half of the year.

According to the statistics of China's Fund Industry Association, in the first half of 2024, the scale of hybrid funds was 3.55 trillion yuan, a decrease of 1.45 trillion yuan compared to the end of 2023. However, the scale of equity funds expanded against the trend by 270.555 billion yuan in the first half of the year.

Undoubtedly, stock ETFs are the main force behind this increment.

According to data from the Shenzhen Stock Exchange, in the first half of 2024, the overall scale of ETFs in the two markets increased by 420 billion yuan to 2.47 trillion yuan, a year-on-year growth of 20%. Among them, the scale of ETFs in the Shenzhen market increased by 113.3 billion yuan to 606.6 billion yuan, an increase of 23%. The share of ETFs in the Shenzhen market increased by 71.7 billion shares to 562.8 billion shares, achieving a significant increase in fund inflow.

As more and more stock investors participate in ETF investments, the scale of ETFs in the Shenzhen market continues to grow steadily, with an annual growth rate of 37% since 2020.

The new "National Nine Measures" clearly puts forward the need to vigorously develop equity public funds and promote the development of index-based investments. Since 2024, with the continuous deepening of index-based investment ideas, the influence of the ETF market has continued to expand, maintaining a good development trend, with both the number and scale of products reaching new highs.

According to the Shenzhen Stock Exchange, as the product layout continues to become more diversified and the supporting mechanisms are continuously optimized, ETFs have become increasingly popular tools for investor asset allocation. The participation of medium and long-term funds has significantly increased, and a healthy market ecosystem is gradually forming.

The active inflow of funds indicates active trading in the ETF market. According to the white paper published by the Shenzhen Stock Exchange, in the first half of 2024, the total turnover of domestic ETFs reached 14.66 trillion yuan, with the non-monetary ETFs reaching a total turnover of 11.48 trillion yuan, both setting new half-yearly records.

The average turnover rate of ETFs in the first half of this year was 5.63%, while the turnover rate of the stock market and bond market during the same period was 1.28% and 1.16% respectively. The overall liquidity performance of ETFs is better than that of stocks and bonds.

The ETF market is able to achieve such high trading activity thanks to the high coverage maintained by liquidity service providers in the Shenzhen Stock Exchange ETF market.

As of the end of June 2024, the number of ETFs covered by liquidity service providers in the Shenzhen Stock Exchange reached 393, with a coverage rate of 99%, a 2% increase from the coverage rate at the beginning of 2023.

The mainstream liquidity service provider system of ETFs is an important mechanism aimed at improving the liquidity and trading efficiency of the ETF market. By designating qualified securities firms or other institutions as the main liquidity service providers, the market can obtain higher quality buy and sell quote services, ensuring the activity and price stability of the ETF market.

In December 2023, the Shenzhen Stock Exchange launched the mainstream liquidity service provider mechanism. As of June 2024, the number of mainstream liquidity service providers in the Shenzhen Stock Exchange has reached 18, covering 273 products, accounting for 69% of the total number of ETFs in the Shenzhen market.

The Shenzhen Stock Exchange stated that in the future, it will continue to improve relevant rules and incentive mechanisms to encourage more institutions to participate in the ranks of ETF mainstream liquidity service providers.

Then in the first half of the year, ETFs saw a large-scale inflow of funds, as well as high turnover and high liquidity. What kind of ETFs are being bought? Who is buying them?

The ETF Investment Trading White Paper (June 2024) of the Shenzhen Stock Exchange further addresses this issue.

02

Which ETFs attracted the most funds in the first half of the year?

According to data from the Shenzhen Stock Exchange, in the first half of this year, domestic stock ETFs showed strong fund attraction, with a net inflow of 404.557 billion yuan. Among them, broad-based ETFs were the main force of fund inflows, with a net inflow of 407.597 billion yuan in the first half, contributing to over 90% of the overall net inflow of funds in the ETF market.

In addition, bond ETFs and commodity ETFs also maintained a slightly increasing trend in net inflows in the first half of the year, with net inflows of around 20 billion yuan each.

Cross-border stock ETFs saw a certain degree of slowdown in net fund inflows in the first half of this year compared to last year, with less than 16 billion yuan at present.

In an environment of declining interest rates in the overall market, as the yields of money market funds also decline, currency ETFs, apart from a few preferred varieties by institutions, have generally seen a decrease in attractiveness to incremental funds, maintaining a trend of net outflows in the first half of this year.

From the first half of 2024, looking at the year-on-year data of different ETF categories, the ETFs that grew by more than 10 times in the first half of the year were broad-based index ETFs, bond ETFs, and commodity ETFs, with funds growing by 15 times, nearly 14 times, and 65 times year-on-year, respectively.

What broad-based ETFs and bond ETFs are the funds buying? What are the incremental varieties behind the commodity ETF?

Wind data shows that in the first half of the year, the broad-based ETFs attracted a whopping 400 billion yuan. The main purchases were the SSE 300 ETF, CSI 500 ETF, SSE 50 ETF, CSI 1000 ETF, CSI A50 ETF, and ChinaAMC Star50 ETF. The top 20 broad-based ETFs favored by funds in the first half of the year saw a total net inflow of 417.457 billion yuan, with nearly half of them listed on the Shenzhen Stock Exchange.

The bond market in the first half of the year can be described as the most eye-catching presence in the asset market, leading to the emergence of several hundred billion yuan level bond ETFs, with the overall scale increasing to 109.9 billion yuan. The trading activity of bond ETFs also continued to rise, with monthly turnover reaching a record high, hitting 623.8 billion yuan in June of this year.

What are the most favored varieties for the 23.372 billion yuan net inflow of bond ETFs in the first half of the year?

Wind data shows that the top 5 bond ETFs that attracted the most funds in the first half of the year were the Rich Fund Policy Financial Bond ETF, Haifutong Fund Chengtou ETF, Bosh iFund Convertible Bond ETF, Ping An Fund Corporate Bond ETF, and Haifutong Fund Short-term Financing ETF, with a total net inflow scale reaching as high as 33.197 billion yuan in the first half of the year.

Shenzhen Stock Exchange pointed out in the white paper that with the development of the bond ETF market, the trading activity of bond ETFs may further increase in the future.

Behind the 65-fold surge in net inflows of commodity funds in the first half of this year, gold ETFs contributed to over 90% of the net inflows, with the net inflow scale of ETFs tracking SEG Gold 9999 reaching as high as 16.779 billion yuan in the first half of the year.

Shenzhen Stock Exchange pointed out that this is mainly due to factors such as the Fed's rate cut expectations, central bank gold purchases, and other domestic and international factors supporting the continued rise in gold prices, driving strong market demand for gold investment allocations.

However, one point that needs attention is that the data from the Shenzhen Stock Exchange's white paper also shows that the holding structure data of pass-through and connecting funds shows that in the first half of this year, individual investors had the highest proportion of holdings of commodity-type ETFs, reaching 78.04%. This means that individual investors were the main buyers of gold ETFs in the first half of this year.

Coincidentally, at the same time, the foreign giant Bridgewater Fund massively sold gold ETFs. Data from multiple gold ETF semi-annual reports show that two years after holding gold ETFs, Bridgewater (China) sold 0.189 billion units of gold ETFs.

While individual investors poured in massively, institutions chose to retreat. What does this mean?

This indicates that in addition to understanding the increment of ETF in the first half of the year, it is more meaningful to further analyze the changes in the investor structure behind the increment of ETF and provide reference for subsequent investments.

03

What do individual investors prefer in the first half of the year for ETFs?

With the continuous popularization of the concept of index investment, more and more investors are choosing to use ETFs as a low-cost, highly liquid, and low-threshold investment tool to participate in on-exchange investments.

As of the end of June 2024, the number of ETF holders in the Shenzhen Stock Exchange has reached 3.34 million (excluding pass-through funds), which is 2.29 times the end of 2020.

Based on the disclosed semi-annual report data of ETFs (including pass-through funds), as of the end of June 2024, the proportion of institutional investors holding ETFs exceeded half, with institutional and individual investors holding ETFs accounting for 57% and 43% respectively.

In terms of the absolute value of ETF holdings, the total amount held by individual investors is 1.08 trillion yuan, an increase of 16.284 billion yuan from the end of 2023, accounting for 42.92% of the total. Among them, the total scale of non-monetary ETFs held by individual investors is 0.103 billion yuan, an increase of 16.62 billion yuan from the end of 2023, accounting for 44.34% of the scale.

From the perspective of holding methods, individual investors are more inclined to directly hold ETFs compared to investing in ETF funds. The total amount of ETFs directly held by individual investors is 731.341 billion yuan, accounting for 67.92%. Among them, the total amount of non-monetary ETFs directly held by individual investors is 684.497 billion yuan, accounting for 66.46%.

In terms of the proportion of ETF product types, the scale of ETF holdings by individual investors from high to low is commodity, cross-border, stock, currency, and bond ETFs, accounting for 78.04%, 63.34%, 41.84%, 25.20%, and 14.21% in the first half of the year, respectively.

Looking at the trend of changes, the proportion of ETF products is growing positively for commodity ETFs and bond ETFs, with the personal holdings of bond ETFs increasing by 7.84 percentage points, ranking first in terms of magnitude among all types of investors.

Wing data also supports this change. In the first half of this year, the proportion of individual investors in bond funds was 18.98%, an increase of 4 percentage points from the same period last year's 14.97%. Among the subtypes of bond funds, the proportion of individual investors in long-term pure bond funds, primary bond funds, secondary bond funds, and bond index funds have all reached new highs in recent years.

Looking at domestic stock ETFs, individual investors continue to favor industry-themed ETFs, with the proportion reaching as high as 70.11%, holding a total of 352.922 billion yuan, mainly including themes from brokerage, medical and pharmaceutical, and semiconductor industries.

According to the statistics of the Guotai Junan team, the proportion of individual investors' holdings of industry thematic ETFs in the first half of this year has narrowed. In terms of segmented sectors, the proportion of holdings of dividend low-volatility products has increased significantly, while the proportion of holdings of technology sector products has decreased.

04

Institutional investors hold over half of the ETF market share.

Compared to the increase of only 16 billion yuan in the ETF market share held by individual investors in the first half of the year, institutional investors clearly played a major role in the contrarian growth of the ETF market share, with an increase of 420 billion yuan.

In the first half of this year, the data on ETF holdings and proportions for institutional investors both rebounded. According to the statistics of the Guotai Junan team, as of June 30, institutional investors held 1.28 trillion shares of ETFs, a year-on-year increase of 32.4%.

Institutional investors' ETF holdings in the first half of the year also increased, accounting for 57.98%, up by 2.34 percentage points from the 2023 annual report data. This is the first rebound since the 2021 annual report, indicating a strong willingness for institutional funds to increase their holdings of ETFs.

This data is corroborated by the statistics from the Shenzhen Stock Exchange, as of the end of June 2024, institutional investors held over half of the ETF market share, with institutional and individual investors holding 57% of the ETF market share respectively.

So, what kinds of ETFs do institutional investors prefer?

According to the data from the white paper of the Shenzhen Stock Exchange, as of the end of June 2024, institutional investors held the highest proportion of broad-based ETFs among domestic stock ETFs, with a total holding scale of 877.454 billion yuan (including through connection funds), accounting for 69.60%. This mainly includes broad-based ETFs such as the 300ETF, Shanghai A50 ETF, and 500ETF.

In addition, strategy ETFs represented by dividend ETFs are also favored by institutional investors, with a total holding scale of 41.056 billion yuan, accounting for 55.97%.

Behind the continuous emergence of billion-level bond ETFs this year, the institutional holding structure has shown a trend of diversification. The allocation of corporate pensions and other entities has increased, and general-purpose pledged repo has become an important strategy for institutional investors.

Are the types of ETFs purchased by different institutional investors the same?

According to data from Guotai Junan's team, in the first half of this year, "large funds" have surpassed brokerage and insurance funds to become the largest institutional funds.

Among them, the proportion of broad-based ETFs in holdings has once again significantly increased. As of the mid-year of 2024, this proportion reached 98%, an increase of 13 percentage points year-on-year and an increase of 9 percentage points compared with the previous period.

Among them, the holding proportion of the CSI 300 Index has increased the most, and the holding proportions of the CSI 1000, Star 50, and Chinext Price Index have also increased significantly, reflecting the willingness of "large funds" to increase their holdings in small-cap broad-based and innovation-startup sectors.

For brokerage funds, which are another major force in the ETF holdings, the most significant increase in positions in the first half of the year is industry-themed ETFs, with a holding proportion significantly increased by 16 percentage points to 49%, surpassing the proportion of broad-based ETFs. Looking at specific sectors, the technology sector has the highest holding proportion (23%), with the largest increase (8%), followed by the financial and manufacturing sectors.

As one of the incremental block orders this year, surprisingly, insurance assets, which have always held a dominant position in the industry-themed ETFs since 2021, have experienced a significant decline in market share, dropping 15 percentage points to 39% compared to the previous period. They have been overtaken by broad-based products (44%) in terms of market share. The majority of their purchases were large-cap broad-based ETFs, contributing the majority of the incremental assets in broad-based products.

Data compiled by the Shenzhen Stock Exchange shows that insurance institutions represented by China Life Insurance and New China Life Insurance increased their ETF holdings by a staggering 337.53 billion yuan in the first half of 2024, with the highest proportion held in broad-based ETFs at 69.6%, followed by dividend strategy ETFs.

The statistics above show that both institutional investors and individual investors have been increasing their holdings in dividend strategy themed ETFs in the first half of this year.

Investor preference for dividend strategy ETFs is attributed to policies encouraging listed companies to increase dividends as a way of rewarding investors.

According to a white paper released by the Shenzhen Stock Exchange, in the first half of 2024, the frequency and amount of ETF dividends in both markets saw a significant increase, distributing dividends 30 times from January to June totaling 5.384 billion yuan, a 78% year-on-year growth. In March, the Shenzhen Stock Exchange introduced the market's first monthly dividend product (Wanjia China Southern Dividend ETF), which was well-received by the market, growing in size from 0.26 billion to 3.6 billion yuan.

This year, A-shares have an unexpected increase in funds. Wind data shows that as of August 2024, the total amount of dividends on A-shares is significantly higher than the total amount of fundraising, marking the first time in the history of A-shares. If this trend can continue, it means that dividends from listed companies will gradually become a source of funds for A-shares.

At the same time, the ETF market has seen a "fee reduction wave" in the first half of the year, with a simultaneous reduction in product and transaction fees, and a total management fee income of 58.3 billion yuan for 145 fund companies, a year-on-year decrease of 13.76%. Measures such as dividend reduction and fee reduction effectively reflect the development concept of "finance for the people" and improve investor satisfaction.

In April of this year, the China Securities Regulatory Commission issued the "Administrative Measures for Securities Investment Fund Securities Trading Expenses for Publicly Offered Securities Investment Funds", reducing fund management fees, custody fees, and securities transaction commissions, reducing market investment costs. With the overall guidance of the CSRC, the Shenzhen Stock Exchange, focusing on the interests of investors, promotes the reduction of ETF management fees to effectively enhance the investor experience.

05

Conclusion

For investments, time oscillates between short-term risks and long-term opportunities. People can mitigate short-term risks and seize long-term opportunities through various methods.

In the current sluggish market environment, please make efforts to maintain composure. Pessimists may be correct, however, those who move forward are the optimists.