The world of investment is continuously evolving, particularly in the realm of Exchange-Traded Funds (ETFs). As we approach the end of 2024, a noteworthy trend has emerged: the rapid ascent of actively managed ETFsThis innovative financial product is gaining momentum across various global markets, sparking interest and prompting studies among numerous mutual fund institutions in ChinaWhat implications could the rise of active ETFs have on traditional investment frameworks, and can they indeed surpass established indexing paradigms?

In essence, actively managed ETFs merge the strategic flexibility of actively managed mutual funds with the operational efficiency of ETFsThis dual advantage allows fund managers to implement active investment strategies aimed at achieving above-average returns, while investors benefit from the reduced fees, transparency, and ease of trading that ETFs typically provide

As such, this new direction enables more diverse strategic allocations, presenting a noteworthy shift in how investment strategies can be constructed.

Despite accounting for a relatively small segment of the overall ETF market, the demand for actively managed ETFs has surged in response to volatile market conditions over the past decadeAccording to institutional data, the value of actively managed ETFs has skyrocketed, with an astonishing annual growth rate of 50% from 2013 to 2024, bringing their collective size close to a staggering $1 trillionSuch growth underscores the significant contribution these products have made to fund flows and the expansion of leading asset management firms globally.

In contrast, mainland China has yet to see the introduction of any actively managed equity ETFsHowever, emerging markets overseas have made substantial strides in promoting these innovative products, bolstered by supportive regulatory environments

• Expected Christmas Rally in US Stocks
• Indonesia's Nickel Hopes Falter Amid China's EV Push
• Global Refining Margins Plummet to Record Lows
• Hong Kong ETF Premiums Flash Warning Signs
• Beyond Index Investing: The Potential of ETFs

Industry experts believe that in the wake of growing acceptance of ETF investment philosophies, active ETFs could provide another viable tool for investors seeking actively managed investment opportunities, representing a potential pathway for the future of the Chinese fund industry.

At the core of actively managed ETFs lies their unique blend of trading functionality and active management styleUnlike passive ETFs, which aim to replicate or track a specific index, actively managed ETFs are designed to be a dynamic investment vehicle governed by fund managers exercising discretionThis inherent flexibility allows for adjustments based on market conditions and investment opportunities.

Moreover, actively managed ETFs offer distinct advantages over conventional actively managed fundsFor instance, while active mutual funds typically disclose their holdings monthly, actively managed ETFs provide real-time transparency regarding portfolio composition

This allows investors to monitor their investments continuously, further bolstering confidence in their asset decisionsCoupled with the capability to trade throughout the day like stocks and the associated lower costs, the appeal of actively managed ETFs becomes even more pronounced.

Interestingly, the U.Slaunched its first actively managed ETFs in 2008, and for many years, these vehicles remained low-profileNevertheless, the rapid growth of the global ETF market has propelled actively managed ETFs into one of the fastest-growing segments of the asset management industry in recent times.

Data from a South China mutual fund firm reveals that the growth trajectory of actively managed ETFs has eclipsed that of traditional index ETFsIn 2013, the global market for actively managed ETFs stood at a mere $25 billion, just 1% of all ETF assetsBy mid-2024, this figure had ballooned to $900 billion, now representing 7% of the global ETF landscape

A recent report by BlackRock also highlights this trend; it cited that between 2020 and 2023, the compound annual growth rate of global index ETFs was 11%, while the growth rate for actively managed ETFs reached an impressive 31%. Projections suggest that by 2030, the market for actively managed ETFs could swell to $4 trillion, capturing approximately 16% of the entire global ETF industry.

Regionally, the U.Sdominates the actively managed ETF landscape, comprising around three-quarters of the global marketIn contrast, the Asia-Pacific region is still developing, albeit displaying robust growth potential in product innovation, ecological integration, and liquidity enhancementFurthermore, the Hong Kong market has made headway, witnessing its first actively managed ETF launch in June 2019. By the end of 2023, the number of actively managed ETFs listed on the Hong Kong Stock Exchange increased to 24, collectively valued at approximately HKD 8.6 billion, covering diverse sectors, including monetary markets, blockchain, technology, and ESG investments.

As the size of the actively managed ETF market expands swiftly, their share of net inflows into global ETF assets has also become increasingly significant

For leading asset management firms worldwide, the growth of this segment contributes substantially to both scale and profitabilityBlackRock reported that in 2013, actively managed ETFs constituted only 3.3% of global net inflows into ETFsThat number crossed the 10% threshold by the end of 2020, reaching 11.3%. By mid-2024, share of actively managed ETFs in global net inflows soared to 22%, with over a third of net inflows specifically derived from the American market.

In a noteworthy push, actively managed ETFs have substantially driven asset management growth at firms like BlackRockThe company reported a historical peak in its asset management size, nearly reaching $11.5 trillion – a remarkable increase of 26% year-on-yearMuch of this surge can be attributed to ETFs, as BlackRock garnered over $360 billion in net inflows throughout the first nine months of the year, with more than $170 billion originating from ETFs alone.

As a prime example of the trend, the JP Morgan Equity Premium Income ETF (JEPI), established in 2020, exemplifies the potential of actively managed ETFs

Starting with a modest $170 million in assets at the end of its inaugural year, JEPI saw an inflow of over $20 billion in just two years and grew to $37.18 billion by December 2024, making it the largest actively managed ETF worldwide.

But what accounts for the growing popularity of actively managed ETFs among investors? According to insights from JP Morgan Asset Management, several key factors have contributed to their ascentFirstly, the inherent product characteristics stand outActively managed ETFs are straightforward to operate, with transparent portfolios enabling real-time visibility into holdingsThese funds typically feature lower costs and high liquidity, allowing investors to trade swiftly and efficientlySecondly, they offer significant advantages over traditional active mutual fundsBoth share similar investment teams and research processes; however, actively managed ETFs provide daily updates on holdings, vastly exceeding the transparency of mutual funds' monthly disclosures

Also, unlike mutual funds that limit trades to a single transaction daily, ETFs can be traded throughout the trading day, enhancing flexibility and cost efficiency.

Moreover, actively managed ETFs appeal to a global investor base, in contrast to mutual funds that primarily target domestic investorsThis international outreach further expands the potential sources of investmentsOn top of this, using the ETF structure improves tax efficiency for active managers, as operational designs mean that fund managers generally do not need to sell fund assets to satisfy redemption requestsConsequently, actively managed ETFs present fewer taxable events compared to their mutual fund counterparts, increasing their appeal.

Where does China fit into this rapidly evolving landscape? Currently, mutual fund institutions, particularly those with substantial influence and foreign capital presence, are starting to pay attention to the active ETF trend observed in global markets

There’s a sense of optimism among local experts who view the burgeoning growth of ETFs broadly as a precursor to similar advancements in China's ETF sector.

Actively managed ETFs remain in their formative stage within the mainland Chinese mutual fund market, suggesting a requisite maturation in both managerial capabilities and regulatory frameworksSome experts argue that while Chinese mutual fund institutions develop the necessary infrastructures and strategies for active ETFs, alignment with domestic market conditions will also be essential in crafting suitable operational modalitiesThis adaptation process must build upon existing ETF management experiences, along with robust internal procedures for seamless operations.

Since 2021, following the rollout of numerous enhanced index ETFs, some players in the mutual fund sphere have started embarking on the promising journey of integrating active management techniques with ETF structures

Over the past three years, China’s mutual fund market has seen the introduction of 33 enhanced index ETFs from 18 different institutions, collectively amassing a total of RMB 8.7 billion in asset size as of late December 2024, with the majority focusing on indices such as the CSI 500, 1000, and 2000.

With regard to regulatory progress, previous frameworks restricted ETFs to a passive investment characterization, posing challenges for the global proliferation of actively managed ETFsNevertheless, some of the more innovative capital markets are beginning to embrace active ETFs, paving the way for increased adoptionFor instance, in 2019, the U.SSecurities and Exchange Commission enacted what is now known as the “ETF Rule,” dramatically lowering entry barriers for new ETF issuers, and this propelled an influx of new entrants into the marketMore than 1,100 of the 1,300 actively managed ETFs listed in the U.S

emerged post-implementation of the ETF rule, leading to a remarkable increase in assets under actively managed ETFs from $100 billion in 2019 to nearly $700 billion by mid-2024.

Similarly, in May 2024, the Hong Kong Securities and Futures Commission released updated guidelines allowing for connector funds to invest in approved overseas ETFs, including actively managed ETFs, under specific conditionsGiven that the previous regulations defaulted to passive ETFs, these recent changes significantly broaden the investment scope and opportunities.

In conclusion, as the ETF investment philosophy evolves and finds deeper roots within China's financial landscape, the groundwork for introducing actively managed ETFs appears solidDrawing parallels with other markets, especially as the enhanced index ETFs gain traction, the demand for differentiated ETF pathways is likely to prompt increased exploration into active ETFs by local mutual fund companies, potentially heralding a new chapter of innovation in the Chinese asset management industry.