Bonds ETFs Surge Past $100B, Accelerating Fund Inflow

In 2024, as the bond bull market continues to heat up, the net value scale of various bond ETF products has also seen rapid growth, with the total market scale breaking through 100 billion yuan within the year, while this figure was only 80.152 billion yuan at the end of the fourth quarter of 2023. The scale of individual bond ETF products has also expanded rapidly. It has come to the attention of the media that recently, another bond ETF - the Bosera Convertible Bond ETF - has broken through the 10 billion yuan mark, becoming the fourth bond ETF to join the "10 billion scale club."

Industry insiders believe that although the domestic bond ETF market is still in its early stages of development and is relatively small compared to the 2.4 trillion yuan scale of index bond fund market, the demand for bond ETF allocation will become increasingly strong under the "asset scarcity" background.

Market scale breaks through 100 billion yuan

Recently, the bond ETF market has seen the birth of its fourth 10 billion yuan product. On June 18, the Bosera Convertible Bond ETF scale surpassed the 10 billion yuan mark for the first time. Public information shows that the fund was established in March 2020 and is the first ETF in the market to track convertible bond-related indices. The target index it tracks is the China Convertible Bond and Exchangeable Bond Index, and its sample bonds consist of convertible corporate bonds and exchangeable corporate bonds listed on the Shanghai and Shenzhen stock exchanges.

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Since February of this year, the convertible bond market has performed brightly. As of the end of May, the China Convertible Bond Index has accumulated a gain of over 6% during the period. Leveraging the outstanding performance of the convertible bond market, the Bosera Convertible Bond ETF has attracted a large amount of capital inflow. As of June 25, the fund's scale has increased by about 4 billion yuan within the year, with an increase of about 60%, reaching 11.303 billion yuan. Just a week earlier, on June 18, the Bosera Convertible Bond ETF scale had just broken through the 10 billion yuan mark.

The Bosera Convertible Bond ETF's scale breaking through 10 billion yuan is just an example of the rapid growth in the scale of index bond fund market. There are also several products that have achieved rapid growth in unit net value and shares within the year. The other three bond ETFs that have reached a scale of 10 billion yuan are the Futong China Short-term Financing ETF, the Fullgoal Government Bond ETF, and the Ping An Corporate Bond ETF, which are still growing in scale. As of June 25, the scales of the three funds have reached 25.794 billion yuan, 18.051 billion yuan, and 11.459 billion yuan, respectively.

Driven by the bond bull market, the bond ETF market has also developed rapidly. According to Wind data, as of June 25, the bond ETF market scale has reached 108.328 billion yuan, while in 2023, 2022, and 2021, the market scales were 80.152 billion yuan, 52.932 billion yuan, and 23.818 billion yuan, respectively.

Fund insiders told Yicai that since the beginning of this year, the demand for bond ETFs has grown rapidly, mainly due to several factors. First, the overall bond market has been strong within the year, and investors' demand for different types of bond products has increased significantly. Second, bond ETFs have obvious advantages and prominent tool attributes, with multiple features such as "T+0" trading, high transparency, low fees, and tax advantages. Third, under the "asset scarcity" background, institutional funds such as wealth management and insurance have increased their allocation to bond ETFs.

"On the one hand, under the 'asset scarcity' background, institutions have a high demand for ultra-long-term bond allocation, but the current market lacks long-duration bond ETFs, which are attractive to insurance institutions, bank wealth management, securities asset management, and self-operated securities institutions," the aforementioned person said. There are also private institutions, high-net-worth clients, and some self-operated securities institutions with bond swing trading needs that will also have the motivation to allocate bond ETFs.

Driven by significant institutional capital allocation, bond ETF products have been very active in trading within the year, with an average turnover rate at the forefront of index bond funds. As of June 25, the average turnover rate of benchmark government bond ETFs has reached 48 times, and the average turnover rates of the 5-year government bond ETF and the 30-year government bond ETF are 84.88% and 55.22%, respectively.CITIC Securities' Chief Economist Ming Ming pointed out that under the bond bull market, market sentiment is gradually evolving to an extreme, with a large amount of trading-type funds continuously chasing the rise and buying, while bond ETFs provide the most convenient tool for them. The 7-10 year interest rate bond ETFs and high-quality credit bond ETFs are expected to continue to be the main allocation varieties.

The future expansion of bond ETFs is expected to continue

Although the market size of index bond funds has broken through 100 billion yuan, the overall scale of China's bond ETFs is still relatively small, and there is still a huge space for scale expansion and variety increase in the future.

Specifically, in the current 100 billion yuan scale of index bond fund market, only 10 fund companies have issued 20 bond ETF products, covering five major categories of national debt, policy finance bonds, local debt, credit bonds, and convertible bonds. Among them, the stock scale of interest rate bond ETFs and credit bond ETFs accounts for more than 800 billion yuan, accounting for 80%.

The aforementioned 20 bond ETF products have all achieved positive returns this year. Generally speaking, long-term products perform much better than short-term ones. The 30-year national debt ETF has the most outstanding performance, with a product return rate of 9.20%, far exceeding the 10-year local debt ETF with a return rate of 5.67% in the second place, and the policy finance bond ETF has a return rate of 4.05% for the year, ranking third; in addition, under the recent violent dynamics of the convertible bond market, the return rate of convertible bond ETFs has dropped to 0.60% for the year.

"Since the end of last year, the share growth of the 30-year national debt ETF has basically shown a trend of fluctuating growth, and it is speculated that the main increase in its liability side is trading-type funds." Ming Ming pointed out that the 10-year national debt ETF and two credit bond ETFs may correspond to more purchases of configuration-type funds.

Many institutional insiders have told reporters that the medium and long-term allocation value of bond ETFs is emerging. "At present, the types and scales of China's bond ETF products are relatively small, accounting for less than 5% of the scale of index funds." A public fund insider in East China told reporters that the bond ETF market still has a huge space for the growth of product quantity and scale in the future, and is expected to continue to expand, with medium and long-term allocation value.

The aforementioned person said that bond ETFs refer to bond indices as the tracking benchmark. Investors can both subscribe and redeem in the primary market and trade bond ETF shares in the secondary market to achieve a basket investment in bonds. In the current context of low risk-free yields, the appeal of arbitrage interest income is gradually diminishing, and many investors hope to increase returns through swing trading. "Bond ETFs can both trade T+0 in the market and adopt cash redemption methods. Their advantages of risk diversification, flexible investment, high liquidity, and low cost have attracted many customers."

Ming Ming believes that after entering the second quarter, the fluctuation of bond market interest rates will return to the traditional logical framework of fundamentals and policy faces, and the slowdown of institutional trading motives may lead to a slowdown in the scale growth of ultra-long-term ETF products. However, there is still a large growth space for medium and long-term interest rate bonds and credit bond ETFs.