Foreign asset managers, mutual funds, private funds, and brokerage houses are among the biggest holders of exchange-traded funds in China, indicating growing confidence in ETFs as a strategic asset allocation tool.

While broad-based indices reflect short-term market volatility, analysts believe a series of policy measures launched since late last year will stimulate economic recovery.

Market participants are optimistic about the medium- and long-term prospects of Chinese assets, bolstered by a stable economic foundation and steady implementation of supportive policies.

Several ETFs were launched towards the end of last year, and institutional investors, especially foreign asset managers and private equity funds, have been among the top ten holders of these instruments, according to public market data.

As of the end of November 2024, data from Chinese think tank Simuwang indicates that more than 120 private funds were among the top ten holders of Chinese ETFs, collectively holding nearly 3 billion ETF shares.

Subjective long-only strategies dominate this activity, accounting for about 40% of private funds' ETF holdings, according to the think tank. Amid the market volatility, investors are using ETFs to diversify their portfolios, compensating for research limitations in certain sectors.

Favourite sectors

Leading private funds are targeting cyclical stocks and growth sectors on the belief that cyclical companies with operational resilience stand to benefit as supportive policies unfold and the economy recovers.

In particular, domestic demand-driven sectors such as automotive, real estate, and home appliances are poised to benefit from fiscal policies, and are therefore worth watching, according to private fund managers.

Meanwhile, enterprises in growth areas, relatively detached from macroeconomic cycles, are driven by industry-specific trends. High-growth segments such as electric vehicles and AI-related industries, including computing power and intelligent terminals, present significant investment opportunities.

The continued issuance of ETFs is expected to support market momentum. As of late December, 21 ETFs tracking broad-based indices are going through the registration process, according to public market information. Fund managers share that broad-based indices such as A500 or ChiNext 50 are popular benchmarks.

Moreover, the inclusion of 85 equity ETFs in the individual pension investment product directory announced last December is likely to boost investor interest in the market.

Analysts project that individual pensions could contribute an incremental 1 to 3 trillion yuan ( US$140-410 billion ) to the market by 2030 as ETFs’ low fees, risk diversification feature, and high level of transparency attract more pension investors.

This in turn will encourage long-term institutional investors to increase their ETF holdings, indicating a more mature, sophisticated and stable outlook for the market.