The launch of the first wave of benchmark market-making corporate bond ETFs marks a significant milestone in China’s financial landscapeA total of eight major fund companies, including well-regarded names such as E Fund, Southern Fund, Bosera Fund, and Hua Xia Fund, have joined forces to breathe new life into the nation's capital market, showcasing increased innovation and competition.

This new market-making corporate bond ETF series is focused on tracking the Shenzhen benchmark market-making credit bond index and the Shanghai benchmark market-making corporate bond indexThe ingenious design integrates the role of market makers, which is a crucial development for bond ETFs as it enhances their market efficiency and investment appeal.

The introduction of these benchmarks carries profound implications for the rapid expansion of bond ETFs throughout the capital markets

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Investors have been clamoring for stable yield instruments, which has solidified the indexing investment philosophySuch a demand presents a logical foundation upon which bond ETFs can grow swiftlyThe diversification of product forms along with improvements in regulatory frameworks not only signals an evolution in the public mutual fund industry but also a transition from mere quantity expansion to a more quality-oriented approach.

Eight benchmark market-making corporate bond ETFs have made their debut recentlyAmong the companies participating, E Fund, Southern Fund, and Hua Xia Fund have received approval for the Shanghai benchmark, while Bosera Fund, Dachen Fund, Tianhong Fund, and Guangfa Fund are launching ETFs based on the Shenzhen benchmark for credit bondsThis development reveals a concerted effort among competitors to innovate and captivate investors looking for tangible instruments to enhance their portfolios.

A closer examination of the components reveals that the underlying assets of these ETFs consist of high-quality, mid-to-high-level rated bonds issued by well-established entities such as central and local state-owned enterprises and innovative tech companies

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This focus on creditworthiness minimizes risk and enhances the security of investment returnsFurthermore, these bonds are characterized by substantial issuance sizes, which helps to spread out individual bond risks effectively, ensuring that investors can achieve stable yields.

Hua Xia Fund emphasizes one of the ETF's key traits: backing from a market-making system at the exchange levelThis thrust toward enhanced liquidity is pivotal, as it addresses the common hurdles tied to developing credit bond ETFsAn increase in liquidity will facilitate better arbitration between the primary and secondary markets, stabilize premiums and discounts, and ease the transaction process for investors wishing to redeem bondsIn light of this, the introduction of a “T+0” trading mechanism will significantly enhance the ability of investors to manage their liquidity and allocate their assets more effectively.

From Bosera Fund's perspective, the introduction of benchmark market-making corporate bond ETFs is anticipated to significantly improve liquidity levels for market-made bonds, bolstering the market's price discovery capabilities and invigorating trading activities within the bond market

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Notably, mid-to-high-grade credit bonds have yielded favorable returns in recent years, particularly against a backdrop of moderately loose monetary policy, leading to their promising investment potential.

The road ahead for bond ETFs appears promising, as evidenced by the active engagement from the eight fund companies that have taken the plunge into this inaugural issuanceThis move initiates a broader expansion of the bond ETF market, enriching the array of products available to investorsAccording to data from Choice, when assessing the bond ETF landscape up to the end of 2024, there were a mere 21 existing bond ETFs, collectively valued at approximately 179.986 billion yuanOut of these, only three belong to the credit bond category, with no new entrants in this segment for over four years.

As the ETF marketplace flourishes, the upward trajectory of stock ETFs has proven to be an essential reference for the expansion of bond ETFs

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With burgeoning interest in diverse investment vehicles, foundational ETF indices like the CSI A50 and CSI A500 have emerged as critical assets for capital managementMoreover, traditional indices like the Shanghai 180 have undergone upgrades leading to the development of fresh ETF productsThis evolution not only heightened market engagement but also ignited a continuous stream of innovative product offerings.

By the close of 2024, the number of stock ETFs reached 835, boasting a cumulative scale that surpasses 2.89 trillion yuanCompared to the previous year, both ETF quantity and scale surged by remarkable margins of 17.94% and 97.94%, respectively, underscoring the growing investor appetite in this arena.

Dachen Fund, for instance, asserts that despite the vigorous growth seen in the ETF market, notable disparities persist between stock and bond volumesThis scenario manifests a considerable growth potential for bond ETFs, indicating an opportunity for diversification in terms offered products

As the maturation of capital markets, complexity in the economic environment, and shifts in market sentiments converge, passive investment strategies symbolized through ETFs are likely to remain dominant, propelling the ongoing expansion of bond-type ETFs.

Industry insiders opine that the progression toward a more varied product lineup and refined regulatory frameworks signals a transformative phase for public mutual funds, transitioning from quantity expansion to a more quality-centric focus.

Li Yishuo, the General Manager of E Fund’s Fixed Income Specific Strategy Investment Department, points out that exchange-listed corporate bonds serve as a cornerstone for corporate financingThe unveiling of benchmark market-making corporate bond ETFs is expected to bolster market liquidity, reduce the financing costs for issuers, and consequently serve the real economy more effectively.

In an additional insight, an executive from a Southern Fund company stresses the significance of expanding low-risk ETFs amidst the rapid growth of high-risk alternatives