The world of investing is continuously evolving, and one of the latest phenomena in the financial markets today is the rise of Exchange-Traded Funds (ETFs), particularly in the bond marketAs of January 7, 2024, four new Shanghai Stock Exchange-based corporate bond ETFs and four Shenzhen Stock Exchange-based credit bond ETFs are set to hit the market, signaling a fresh wave of investment opportunities for savvy investors.

ETFs have emerged as one of the hottest types of index funds in recent years, capturing the attention and enthusiasm of countless investorsThe decision of eight public fund companies to explore the less conventional terrain of bond ETFs is particularly noteworthyThe newly approved ETFs each carry an initial fundraising limit of 3 billion CNY, collectively expected to infuse the bond ETF market with an impressive 24 billion CNY in fresh capital

This significant capital influx is particularly intriguing as it indicates a growing demand for bond-based investment vehicles.

Over the past year, we have witnessed a rapid downward trend in long-term government bond yields, leading to a sustained bullish run in the bond marketThis positive momentum has attracted a wave of low-risk tolerance funds seeking safer investment avenuesExperts in the financial community argue that alongside government bonds, the allocation value of credit bonds is beginning to capture more attention amidst shifting market dynamics.

Emerging Fund Companies Compete in a New Terrain

According to recent analyses, eight public fund companies are entering this competitive arena with the issuance of these four new corporate bond ETFs and four credit bond ETFs

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The firms involved include prominent names such as Hua Xia Fund, Southern Fund, E-Fund, Hai Fu Tong Fund, Guang Fa Fund, Boshi Fund, Da Cheng Fund, and Tian Hong FundNotably, these companies represent some of the largest fund managers in the market today, managing assets in the hundreds of billions.

Among these firms, Guang Fa Fund, Boshi Fund, and E-Fund stand out as having the most robust managerial capabilities in bond funds, with both Guang Fa and Boshi boasting assets exceeding 400 billion CNY in their bond fund portfoliosHowever, it's essential to highlight that the bond ETF segment remains relatively niche, with E-Fund, Guang Fa, and Southern Fund entering this market for the first timeSimilarly, mid-sized firms like Da Cheng and Tian Hong are also debuting their first bond ETFs.

On the other hand, Hai Fu Tong Fund, while smaller in size, has significant experience managing bond ETFs, currently offering five such products, two of which exceed 10 billion CNY in assets

Boshi Fund also adds a valuable option to the mix with its convertible bond ETF, which is currently managing over 20 billion CNY.

The Flexibility of Bond ETFs

The newly approved credit and corporate bond ETFs are designed to track their respective indices on both the Shenzhen and Shanghai stock exchangesA closer look at these indices reveals some distinctions in sample selection for corporate bond ETFs compared to credit bond ETFsThe Shanghai Stock Exchange’s corporate bond index comprises only those corporate bonds that meet specific criteria, such as a minimum issuance size of 2 billion CNY and a credit rating of AAA or above, focusing heavily on tech-oriented green bonds and privately issued securities.

Conversely, the Shenzhen index is a bit broader

It encompasses corporate and enterprise bonds within the exchange’s specified range of securities, focusing primarily on public corporate bonds that meet similar stringent requirementsBoth types of bond ETF employ a “T+0” trading mechanism, allowing for greater trading flexibility compared to traditional funds.

Experts highlight that these benchmark city-issued bonds typically feature larger volumes and better liquidity compared to standard mid-high-grade credit bondsAs Zhang Lei, a fund manager at Boshi Fund’s fixed income investment department, noted, the relative scarcity of bond ETFs underlines their role in actively enhancing the trading environment for corporate bonds while serving as excellent investment tools for diverse investors.

The increasing preference for bond ETFs is attributed to their notable attributes, such as cost efficiency, clear risk-return profiles, transparent underlying assets, low investment thresholds, and high trading efficiency

These characteristics enable various kinds of investors to implement their desired portfolio strategies concerning asset allocation, timing, and duration—making them an admirable addition to traditional bond investment products.

Sustained Trends in the Bond Market

Despite the expansive and well-established world of stock ETFs, bond ETFs have remained a relatively smaller segmentRecent data published by Wind indicates that as of the end of the third quarter of the previous year, the total size of bond ETFs stood at a modest 137.15 billion CNY, primarily composed of short-term government or national development bondsThe market for long-dated bond index funds, such as 10-year and 30-year government bonds, remains limited.

The prior year revealed impressive performances among interest rate bonds, characterized by a fast decline in long-term government bond yields, resulting in a bull market that many investors have clamored to join

Current figures show that the yield of 10-year government bonds is hovering around 1.6%, while yields for 30-year bonds are around 1.83%, indicating that long-duration rates have remained at historic lows.

When interviewed, Zeng Fangfang, an analyst at Pai Pai Wang concerning public wealth products, indicated that the downward potential for the 10-year and 30-year government bond yields is becoming increasingly constrainedThis presents a challenge regarding the appeal of interest rate bonds in low-yield environments.

In light of this backdrop, Zeng underscored that credit bonds, while also subject to interest rate risks, carry apparent relative yield advantages, amplifying feasible conditions for the launch of credit bond ETFsSuch offerings could subsequently provide essential funding channels for the real economy, thereby facilitating a reduction in financing costs for enterprises—a compelling prospect for investors and borrowers alike.

“The bond market trends are likely to prolong