The arrival of Active Equity ETFs is drawing closer.
On July 17th, the first batch of 18 Active Equity ETF products had their issuance applications submitted to and officially accepted by the China Securities Regulatory Commission. Following the fund review and issuance procedures, these products are expected to enter the issuance stage after completing processes like feedback inquiries.
From a product classification perspective, these offerings bridge the two major investment domains of passive investing (index-based investing) and active investing. They introduce direct innovations across numerous areas including product trading, information disclosure, and investment management. They are arguably the most significant innovative product in the fund industry over the past five years.
Their emergence is viewed by the market as potentially revitalizing the currently slowing growth rate of the ETF market and rekindling interest from off-exchange capital inflows. However, some perspectives hold that due to the substantial degree of innovation in Active Equity ETFs, it remains to be seen whether the market will embrace them and whether fund managers can effectively manage them.
An "Innovation Crossing Boundaries" in Investment Approaches
Equity-focused funds are broadly categorized into two main camps based on their investment management style: actively managed funds and passively managed funds (including index funds, ETFs, etc.).
The former are led by fund managers who make investment decisions based on the subjective judgment of the management team; hence the term "active" investing.
The latter are guided by a corresponding index, completing investment decisions by replicating that index; thus termed "passive" investing.
Consequently, funds executing passive investment are collectively referred to as index funds, with the most popular product within this category being those index funds also listed on stock exchanges—ETFs.
However, the name "Active Equity ETF" itself sounds like it "crosses boundaries." It is both active and an ETF, a product that openly steps over the conventional lines separating the active and passive investment camps.
Moreover, following the pattern of innovative products, it will inevitably incorporate a significant number of innovative mechanisms beyond traditional thinking to support its structure.
What's New About "Active Equity ETFs"?
According to the business guidelines of the Shanghai and Shenzhen stock exchanges, an active ETF is an ETF where the fund manager independently chooses the investment strategy, does not aim to track a specific index as its investment objective, and is listed and traded on an exchange.
In other words, it retains the trading and operational mechanisms of an ETF but hands the decision-making power for portfolio construction to the fund manager.
For ordinary investors, however, its innovations extend further.
Innovation One: Fund managers will disclose their portfolios daily and provide real-time net asset value estimates. Investors who enjoy "copying homework" are in for a treat.
As core secrets of active management, the disclosure intervals for a fund manager's investment operations are typically very long, with significant lags in portfolio disclosures, often stretching to several months.
However, according to the rules for Active Equity ETFs, all such ETFs will disclose their portfolios before the market opens each day and provide intraday net asset value reference estimates during trading hours. Daily fund performance and investment operations will be highly transparent.
Innovation Two: Top-performing funds will no longer need to fear closing subscriptions.
Over the past year, funds with strong year-to-date performance and significant allocations to quality assets have frequently closed their subscriptions, leaving many investors with no way to invest.
If these fund managers launch Active Equity ETFs in the future, investors, even if unable to subscribe to the primary offering, can directly purchase the fund on the secondary market.
Furthermore, such purchases allow investors to immediately benefit from the fund's subsequent gains on the same day (whereas off-exchange subscriptions typically require 1-2 days for confirmation).
Innovation Three: Zero subscription/redemption fees for trading the fund.
Does it feel expensive to pay substantial costs for subscribing to and redeeming a fund offline, even with discounted fee rates?
Now, you have the possibility to buy and sell a fund with zero subscription or redemption fees. This is the Active Equity ETF. It's still a product meticulously managed by a fund manager, but when trading on the exchange, you only need to pay a minimal brokerage commission—currently around 0.06% (six basis points).
The cost is the same when selling.
Isn't that a pleasant thought?
First Batch of 18 Fund Management Companies Enter the Arena
According to announcement information, the first pilot batch of active ETFs covers 18 fund management companies, with 9 products each applying for listing on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
Among them, fund managers with products intended for listing on the Shanghai Stock Exchange include E Fund Management, Morgan Stanley Fund Management, Yongying Fund, Huatai-PineBridge Fund, China Merchants Fund, China Universal Asset Management, Hua An Fund, and ChinaAMC, among others. Those with products intended for listing on the Shenzhen Stock Exchange include Southern Asset Management, Fullgoal Fund, Penghua Fund, ICBC Credit Suisse Asset Management, HuaBao Fund, Guotai Asset Management, and Tianhong Asset Management, among others.
As of the time of writing, the approval status for all 18 products is "Application Materials Received."
Just from the names, it's evident that the first batch of equity ETFs primarily consists of two distinct investment styles.
Funds from Guotai, HuaBao, Tianhong, and China Universal include terms like "balanced" or "steady" in their names. Those from Penghua, Fullgoal, China Merchants, and Huatai-PineBridge include "value." Funds from ICBC Credit Suisse and Dacheng include "dividend" in their names. Southern's fund name references a "large-cap style." It's highly likely that these institutions are issuing Active Equity ETFs with a bias towards value and balanced styles.
Meanwhile, the "prosperity strategy" chosen by Yongying and the "quality future" selected by E Fund suggest their styles may lean towards growth, judging by the names.
How to Select from the First Batch of Active Equity ETFs?
Given that Active Equity ETFs combine many advantages, how should investors choose from the initial batch of products? Here are several guidelines for reference.
First, it is strongly recommended that potential buyers carefully read the fund prospectus. The underlying mechanisms of innovative products differ from traditional ones, and the rules, investment arrangements, and even sales policies may vary between products. Careful reading is absolutely essential.
Second, prioritize selecting a fund manager you trust. At its core, an Active Equity ETF is an actively managed fund with an exchange-traded mechanism. The fund manager's performance significantly impacts the product's returns.
Third, appropriately consider the institution's team, platform, and fee structure. Given that it's a listed product, there are operational and maintenance components involved, unlike purely off-exchange equity funds. Therefore, the team, platform, and product fees will significantly influence the fund's returns and client experience.
Fourth, pay close attention to the fund manager's portfolio turnover rate. If the manager of an Active Equity ETF has a style characterized by excessively high turnover, it could pose many challenges in ETF management. Examples include extremely high transaction costs, potential inefficiencies in the product's arbitrage mechanisms, and low market trading liquidity. Conversely, if the trading turnover is too low, it might essentially become another type of index product, but with higher fees.
Finally, the Active Equity ETFs that are truly suitable and gain market recognition will likely be those with excellent long-term performance, distinct investment styles, and moderate portfolio turnover.
Of course, detailed discussions on specific products should wait until all prospectuses for the first batch are published. That is a topic for another time.
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