Experts attribute this rapid expansion of the bond ETF market to a confluence of factors

According to Professor Tian Lihui from Nankai University, the appeal of credit bond ETFs has surged among institutional investors such as banks, particularly amidst a backdrop of fluctuating equity assets in recent yearsEchoing this perspective, Chen Li, director of Chuan Cai Securities Research Institute, asserts that this year's favorable bond market conditions, dubbed the "bond bull market," have positioned these products well, especially as long-duration assets become increasingly favored by investors—resulting in a swift rise in the scale of long-duration rate bond ETFs.

On a policy level, a notable development occurred in April when the new "National Nine Articles" proposed the establishment of a fast-track approval process for ETFs, designed to bolster index-based investmentThe high transparency inherent to rate bond index funds aligns perfectly with the regulatory requirements governing institutional investors

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This, combined with the introduction of bond ETFs as new investment options within margin trading, the reform in public fund fees benefitting passive funds, and the greater market-oriented pricing capability in the bond market, collectively create a conducive environment for the flourishing of bond ETFsChen noted that regulatory bodies are actively promoting connectivity between the interbank market and the exchange market while supporting the development of innovative products—all of which accelerate the growth trajectory of bond ETFs.

The fundamental characteristics of the products themselves also play an essential role in attracting more investmentsIndustry insiders summarize the advantages of bond ETFs as "two highs, two lows, and one diversification," which means high liquidity, low management fees, high transparency, low investment thresholds, and risk diversification.

Investors are afforded the flexibility of subscribing or redeeming through the primary market, as well as engaging in transactions on the secondary market anytime they choose, thereby benefiting from the "T+0" trading system

Chen elaborated that the risk diversification advantage of bond ETFs arises from their typical strategy of replicating benchmark indices, which mitigates the impact of any single bond's default on the overall portfolio.

Furthermore, bond ETFs excel in precise duration allocation and tax advantagesTian Lihui emphasizes that bond ETFs prioritize subcategorization of bond types and durations, allowing investors the opportunity to select specific combinations based on duration and type preferencesNotably, dividends obtained from equity investment funds are exempt from income tax for both individual and institutional investorsCompared to other asset management entities and self-managed institutions, public funds investing in bonds benefit from complete exemption from corporate income taxes.

Despite the bond ETF market breaching the 160 billion yuan threshold, it's important to recognize that, domestically, this figure still represents a relatively small fraction of the total ETF market size, indicating ample growth potential looking forward

Chen advocates that bond ETFs remain in an early developmental phase and suggests further efforts to facilitate connectivity between interbank and exchange markets to achieve broader market coverage.

Currently, the variety and forms of bond ETF products available in China are somewhat limitedChen posits that the pivotal factor for developing bond ETF products lies in innovation, encouraging organizations to explore the development of cross-market bond ETFs and to broaden the scope of duration and types to satisfy varying investor requirements.

As the philosophy of index-based investment garners increasing approval from a growing number of investors, the role of ETFs is expected to pivot towards actively attracting medium- to long-term capital into the market, thereby serving the real economy and addressing wealth management needs of the populaceProfessor Tian Lihui suggests that expanding the inclusion of bond ETFs within the asset advising sector could be beneficial as it seeks to tap into foreign capital markets to enrich the existing investor structure, thus further diversifying investment channels for bond ETFs.