Investing.com -- China’s exchange traded fund, or ETF, market has exploded in recent years, with passive funds now outmuscling their active rivals and reshaping the landscape of the world’s second-largest equity market. But as the ETF boom accelerates, questions are swirling about what this means for A-share liquidity, volatility, and the future of active management.
“Chinese ETFs’ A-share holdings surpassed those of actively managed equity mutual funds for the first time as of end-2024,” UBS strategists said in a recent note, adding that country’s ETF industry has grown at a blistering pace, clocking a 40% compound annual growth rate in assets under management since 2005.
UBS points to three factors that are behind this seismic shift: the disappointing performance of active managers—“67% underperformed the CSI 300 Index over the past three years”—the growing role of China’s “national team” as a stabilizing force, and the appeal of passive funds’ low fees and liquidity in a tough market. With the “national team” stepping in as a major buyer of ETFs during market stress, passive products have become a quasi-stabilization tool for policymakers and investors alike.
This ETF juggernaut isn’t expected to slow down anytime soon. “We expect China’s equity ETFs to enter a stage of rapid development in the next five years,” the strategists said, forecasting assets under management to nearly quintuple to RMB 17 trillion by 2030, or 22% of all mutual fund assets. Product innovation, regulatory support, and the expansion of buy-side investment advisors are set to keep the momentum going.
The consequences of a surging passive ETF industry on the broader market appear to be wide ranging from enhancing liquidity to possible damper on volatility, though the latter is debatable, according to UBS. While some argue that a bigger institutional presence should dampen swings and volatility, UBS said that “market data from the US suggests the volatility of the S&P500 and Russell 2000 indices did not experience a structural downtrend over the past three decades.”
Given the size of the industry, the impact from index rebalancing is clear: stocks added or dropped from major indices like the CSI 300 often see price moves well before the official change, with “a strong share-price reversal” after the fact—suggesting that expectations, not just passive flows, are driving short-term action. Still, as ETF assets swell, “short-term share price movements of new inclusions and exclusions may become more subject to passive fund flows,” the strategist said.