The ongoing reform of fund fee structures is revealing deeper market impacts as cost reductions exceeding tens of billions take effect.
A pronounced "80-20" capital allocation pattern has emerged amid declining fees and expanding product variety. The lowest-fee 20% of funds attracted net inflows surpassing the remaining 80% by over 1 trillion yuan. Retail investors are increasingly shifting from high-volatility single-sector alpha strategies to stable beta returns through systematic asset allocation. Index funds, the primary beneficiaries of recent fee cuts, are seeing innovative strategies to enhance investor experience and bridge performance expectations.
**Capital Concentration in Low-Fee Funds** Recent announcements highlight the trend: Harvest Fund reduced the custody fee for its CSI Sub-Industry Chemical ETF from 0.10% to 0.05% on December 5, while GL Fund cut management and custody fees for its 1-3 Year Interbank Credit Bond Index Fund by 50% on December 4. Wind data shows over 20 equity index funds have slashed fees since H2 2025, bringing the average management fee for index funds to 0.518% as of December 5, down from 0.535% at end-2024.
Though reforms began in 2023, widespread passive fund fee reductions occurred mainly during 2024-2025. Third-party research indicates investors' actual paid fees for both active and passive funds have declined over the past decade, with passive equity funds leading the 2024 reductions - their fees plunged 29 basis points year-on-year.
This fee compression is reshaping investment behavior: low-fee passive funds drew record net inflows of 1.22 trillion yuan in 2024 alone. The top 20% lowest-fee funds collectively outpaced others by 1.47 trillion yuan in net inflows over three years, with 2024's gap (977.6 billion yuan) exceeding the cumulative 2015-2023 differential. Across hybrid, equity, and bond-biased funds, products in the bottom 40% fee tier captured over 60% of total inflows.
**From Existence to Excellence** Beyond cost savings, the fee revolution is driving qualitative improvements in index fund ecosystems. A joint study by GF Securities and JoinQuant observes accelerating migration from active to passive strategies, as ETF growth offsets declines in non-index active equity funds. Investors are transitioning from "alpha hunting" via stock-picking to systematic "beta cultivation" through asset allocation - a shift benefiting long-term returns, market stability, and capital efficiency.
Leading asset managers are building comprehensive index product matrices: broad-based indices (CSI 300, CSI 500, ChiNext) form core holdings; thematic ETFs (robotics, semiconductors) capture growth opportunities; niche products (IoT, electronics) add granularity. This "hotpot portfolio" approach - with broad indices as staples, sector funds as side dishes, and alternative products as seasonings - helps diversify non-systematic risks while targeting specific opportunities.
"With abundant choices post fee cuts, the focus has shifted from access to quality," noted a southern mid-sized fund executive. "Investors now prioritize sustainable returns over mere cost savings, recognizing beta strategies' suitability versus high-risk alpha pursuits."
**Optimizing the Investor Experience** As fee competition reaches equilibrium, differentiation shifts to qualitative dimensions - particularly investor experience enhancement. Three key pain points persist: product selection complexity in crowded categories; limited index options for certain strategies; and implementation challenges in aligning indices with personal goals.
The research introduces "drawdown area" - quantifying cumulative investor stress by measuring the depth and duration of losses. Analysis of five major indices from March 2022-February 2025 revealed counterintuitive findings: while CSI 300 showed smallest maximum drawdown and mixed funds exhibited lowest volatility, these struggled to recover losses. Conversely, the high-volatility CSI 2000 Index generated new highs with relatively faster recovery, delivering superior holding experience.
Proposed solutions include constructing low-correlation enhanced index fund combinations (e.g., CSI 300 + CSI 2000 enhanced) or adding bond indices to equity portfolios. Interactive tools allowing dynamic asset allocation adjustments based on "return-pain curves" may further personalize index investing experiences.
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