Ge Yao Zhang Lingzhi

  On July 4, ETF trading under the interconnection and interoperability kicked off.

In order to meet the transaction moment, the institutions of the two places are actively preparing.

Landlord Ming, head of UBS Global Financial Markets China, said that UBS Securities has been closely planning system upgrades recently to improve automatic monitoring of relevant abnormal transactions.

At the same time, mainland fund companies have also made a lot of preparations in terms of technical systems and marketing channels.

  Some mainland fund companies have taken the lead in preparing for overseas publicity work.

In the face of the "feast" of ETFs with rich categories in the mainland market, what is the "taste" of foreign investors?

A reporter from China Securities Journal learned from research that foreign investors not only pay attention to product liquidity, tracking error, transaction costs, etc. when choosing ETFs, but also carefully research the management experience and management scale of the issuer.

From an industry perspective, ETFs in mainland advantageous industries with strong scarcity, such as semiconductors, new energy, electric vehicles, and 5G, are more likely to be favored by foreign investors.

  Industry insiders predict that the interconnection of ETFs will lead to a marginal increase in the transaction scale of northbound funds in the A-share market. If calculated on an annual increase of 10%, this move may bring more than 40 billion yuan of incremental funds to the A-share market each year.

In the long run, A shares will usher in "long money" at the level of 100 billion yuan.

 Institutions in the two places "grab the beach" one after another

  After the two China Securities Regulatory Commissions announced that ETFs were included in the interconnection mechanism, the Hong Kong Stock Exchange immediately announced the initial list of 83 northbound qualified ETFs.

A reporter from China Securities Journal combed through the list and found that these 83 ETFs belong to 20 fund managers.

GF Fund has the largest number of ETFs included in the initial list, with a total of 12; China Asset Management has 10 products; Cathay Pacific Fund has 8 products; E Fund, China Southern Asset Management and Tianhong Fund have 7 products each; Harvest Fund, Four products from Huabao Fund were selected; Huatai-Pineapple Fund, Yinhua Fund, and Wells Fargo Fund also all had products selected.

  In terms of scale, statistics provided by Huicheng Fund show that as of June 30, the total scale of the 83 ETFs included in the initial list was 679.245 billion yuan.

From the perspective of fund companies, China Asset Management has the largest selected products with a total scale of 137.969 billion yuan; Huatai-PineBridge Fund is close behind, with a total scale of more than 80 billion ETFs selected; Cathay Pacific Fund has a total scale of more than 70 billion selected products. Yuan; the total scale of selected products of Southern Asset Management exceeds 60 billion yuan; the scale of selected products of Huabao Fund and E Fund Fund is about 50 billion yuan; the scale of selected products of GF Fund, Tianhong Fund and Huaan Fund is more than 30 billion yuan.

  "After the ETF is included in the interconnection, what we hope most is to let overseas investors understand the company as soon as possible." said the person in charge of the relevant business of a large mainland fund company.

A reporter from China Securities Journal has learned that some mainland fund companies plan to advertise on Hong Kong TV media and conduct local publicity through their Hong Kong subsidiaries.

  Publicity is only part of the preparation.

The mainland fund companies whose products are included in the ETF interconnection have not slack off in terms of technical systems and other aspects.

Luo Guoqing, head of the index investment department of GF Fund, said: "At present, all aspects of business, technology, market and other aspects are basically ready." He introduced that the company has cooperated closely with relevant parties in the market and actively participated in the transformation and testing of technology systems. Good business risk prevention.

Strengthen ETF team building internally, and conscientiously provide investor education services externally.

  On the other hand, the preparations of foreign securities companies are non-stop.

As one of the most active foreign brokers in Shanghai-Shenzhen-Hong Kong Stock Connect, UBS Global Financial Markets China Director Ming Fang told the China Securities Journal: "We have been intensively debugging the system recently to ensure the smooth operation of the ETF trading system on July 4. Landlord Ming said: "A total of 87 ETFs have been included in the interconnection this time, and it is not difficult to add 87 codes to our trading system. More importantly, to ensure the safety of investors' transactions in electronic trading, it is necessary to Improve the automatic monitoring of relevant abnormal transactions, and make corresponding system upgrades to the unique call auction and other mechanisms in ETF transactions."

  Overseas long money has different "tastes"

  From the perspective of foreign investors, the mainland has many advantageous industries or track ETFs with strong scarcity, which were often difficult to invest directly in the past.

Luo Xun, director of multi-asset investment at Aberdeen, a veteran European investment agency, said: "Industry ETFs such as semiconductors, new energy, electric vehicles, and 5G are relatively scarce targets in the global market. There are also unique liquor, central enterprise reform and other themed ETFs, and ETFs in important industries such as rare earths are favored by investors.” Luo Xun said that although these ETFs are also issued in overseas markets, their scale and liquidity are usually insufficient, and their exchanges are not in the same trading time zone as the index they track. , the tracking error is also relatively large.

  Therefore, before ETFs were included in China Connect, foreign investment institutions had to "curve investment" in order to invest in mainland ETFs.

According to Landlord Ming, there are two ways for foreign investors to invest in mainland ETFs: one way is to purchase ETFs through QFII quotas; the other way is that securities companies package a basket of stocks into structured products and sell them to investors. The underlying stocks of the products purchased through Shanghai-Shenzhen-Hong Kong Stock Connect or QFII indirectly achieve the effect of investing in ETFs.

  Both approaches have their limitations: not all foreign investors are eligible for QFII; and a structured product, a basket of stocks, is not as close to the index as an ETF.

At the same time, as a customized product, an investor who buys a basket of stocks has only one counterparty, a brokerage, so the transaction friction cost is higher.

"ETF liquidity and transaction costs are better." Landlord Ming said.

  With the official opening of ETF interconnection, the accessibility of mainland ETFs to foreign investors has been greatly increased.

"The interconnection of ETFs has enriched the investment channels and trading varieties of domestic and foreign investors, which will help mainland ETFs, especially some distinctive varieties, to be further increased by foreign investors." The person in charge of Harvest Fund's related business said.

  What is the "taste" of foreign investors, and what is a good ETF in their eyes?

Foreign sources told the China Securities Journal that when choosing an ETF, both the qualifications of the issuer and the performance of the ETF should be considered.

  "We are more concerned about the history, brand, ETF management experience, ETF management scale and other factors of the ETF issuer." Luo Xun said that from the perspective of the ETF itself, overseas investment institutions will examine product scale, liquidity, tracking error, long-term performance, Transaction and holding costs.

In addition, the overlap between the trading hours of the ETF and the trading hours of the index it tracks is also a key consideration.

  Different types of foreign investors also have different demands.

Landlord Ming introduced that investors of northbound funds are often divided into two categories: one is transactional investors, who are accustomed to investing through quantitative analysis and technical analysis. These investors have a high turnover rate and transaction volume. When choosing ETFs, they often focus on the liquidity of ETFs; the other type is allocation-type investors, who make investment decisions by analyzing factors such as industry and company fundamentals, profit growth, etc. Such investors are concerned about the tracking error and management fees of ETFs.

From an industry perspective, some targets unique to the mainland market may be favored by allocation investors.

"Investors who focus on macro strategies may prefer broad-based index products of large, medium and small caps, such as CSI 300, CSI 500, ChiNext Index, etc. Some industry index products supported by policy, as well as ESG, carbon neutral Industry ETFs that are relatively scarce in the global market, such as and, batteries, and defense, are also expected to be more popular." Landlord Ming said.

  Zhao Yunyang, investment director and fund manager of Bosera Fund Index and Quantitative Investment Department, said that themed ETFs with large growth space and policy support will be favored by overseas investment institutions.

"Mainland ETFs may be the most attractive to overseas investors are industry and theme ETFs. Because such ETFs are currently rarely listed overseas, there is scarcity, and at the same time, some industries and themes have large long-term growth space and strong growth certainty. This will be more attractive to overseas investors with a long investment assessment period. Specifically, new energy, semiconductor and other themed ETFs with clear long-term growth space and policy support will be favored. The other type is long-term stable development. industry-themed ETFs, and consumer-industry ETFs favored by foreign investors will be focused on allocation.”

  Bring in considerable incremental capital

  The ETF interconnection transaction has officially "opened the gate", and industry insiders expect that this will bring considerable incremental funds to the A-share market.

  "It is expected that the interconnection of ETFs will lead to a marginal increase in the transaction scale of northbound funds in the A-share market." Landlord Ming said that after the inclusion of ETFs in the interconnection, foreign investors who originally participated in A-share investment by buying stocks or a basket of stocks may have Some of them turned to participate in A-share investment through ETF.

The trade-off between the two may eventually bring a positive annual growth of 10% to northbound funds.

  Wind data shows that in the whole year of 2021, the total net purchase of northbound funds was 432.169 billion yuan.

Since the opening of Shanghai-Shenzhen-Hong Kong Stock Connect, northbound funds have accumulated a net purchase of 1,706.377 billion yuan.

If the transaction scale increases by 10% annually, after the ETF is included in China Connect, it may bring more than 40 billion yuan of incremental funds to A-shares every year.

In the long run, the incremental capital pouring into the A-share market will be considerable.

  Industry insiders said that the interconnection of ETFs may become an important way for many foreign investors to test the waters of A-shares.

The person in charge of relevant business of Harvest Fund said: "Many foreign investors have concerns about direct investment in A-share stocks, and at the same time, they have relatively little understanding of mainland fund managers. A convenient channel for trading to enter the A-share market brings considerable incremental capital to the market.”

  For mainland fund companies, ETF interconnection not only brings incremental funds, but also brings competition.

The rates of ETFs in overseas markets are generally low. A senior industry insider said that in the past two years, Fidelity, a latecomer in the ETF market, issued zero-fee ETFs. The three largest asset management institutions in the global market for ETFs are Pioneer Pilot and Beibei. Ryder and State Street are also involved in the price war.

"Whether it is foreign asset management institutions entering the Chinese market or domestic ETFs 'going overseas', fee reduction is an issue that needs to be faced head-on. In the future, the competition among asset management institutions will be more intense, and it will also have a profound impact on the industry landscape."

  In addition, domestic and foreign investors have different perceptions of the tracking error indicator.

He Xian, vice president of CSOP, emphasized that tracking error is an indicator that foreign investors pay particular attention to.

Many individual investors in the mainland often prefer ETFs with larger excess returns under the premise of limiting the tracking error. "However, if overseas institutional investors decide to invest in an ETF product, they will observe a lot of details in the preliminary due diligence. Metrics, including tracking error, etc. If an ETF product outperforms, they will be more vigilant, because overperformance means that the product has more risk exposure.”

  In the long run, the positive impact of ETF interconnection cannot be underestimated, and foreign investors' perceptions of rates and tracking errors may have a subtle impact on the mainland ETF sector.

The person in charge of the relevant business of Harvest Fund said that the interconnection of EFT is conducive to promoting the stable and healthy development of the financial market.

In the future, with the addition of northbound funds, the investor structure of ETFs will be more diversified, which will play a positive role in the healthy and stable development of the ETF market.

  Luo Guoqing said that for mainland fund companies, the direct benefit of ETF interconnection is that it can increase the overall size of the ETF and improve the overall liquidity of the ETF.

Under the ETF interconnection mechanism, the introduction of overseas professional institutional investors and overseas medium and long-term allocation investors can improve the structure of mainland ETF investors and promote the further integration of the mainland and Hong Kong markets.

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