CHINA’S exchange-traded funds (ETFs) attracted record inflows in last year’s equity rout just as actively-managed products fell out of favor, a sign that investor preference is shifting.

Stock ETF inflows reached US$77.4 billion in 2023, with 161 new launches, data compiled by Bloomberg show. That contrasts with a decade-low amount raised by new mutual funds last year.

While both active mutual funds and passive ETFs saw their returns tank amid China’s stock market slump, investors appear to be preferring the latter as a cheaper and convenient way of betting on a rebound and chasing themes.

Active managers demand higher fees and their returns vary greatly depending on their top holdings.

“Being a passive investor and holding ETFs can be a good choice going forward as it’s getting difficult to outperform benchmarks over the long term,” said Yang Ruyi, a fund manager at Shanghai Prospect Investment Management Co.

“The assets overseen by active fund managers will shrink due to their poor returns.”

ETFs that saw the biggest inflows include the Huatai-Pinebridge CSI 300 ETF and the ChinaAMC CSI Science and Technology Innovation Board 50 ETF.

China’s equity ETF market grew into a size of US$238 billion last year, up from US$182 billion at the end of 2022 and growing nearly ten-fold since 2014.

With their management fees at around 0.5% per year and some as low as 0.15%, ETFs are seen as a cheaper way of investment. For actively-managed stock mutual funds, the securities regulator last year imposed a cap of 1.2%.

China’s CSI 300 benchmark fell 11% in 2023 in its third straight year of losses, a record streak. It was one of the world’s worst-performing major gauges as a property slump, geopolitical tensions, and a slow economic recovery spurred selling.

While ETF purchases have been a preferred tool to prop up the market by funds, their buying was unlikely the defining factor for the inflows. (SD-Agencies)