ETF rules to better protect shareholders

Guidelines a response to boom as people eye alternative investments

Market regulators have introduced fresh guidelines to better regulate the booming exchange-traded fund or ETF market, in order to protect the interests of individual investors.

According to the guideline released by the Shanghai Stock Exchange on Friday, ETFs scheduled to be traded on the bourse should include at least 30 constituent securities.

The weighting of one constituent should be no more than 15 percent while the top five constituents' collective weighting should be no more than 60 percent.

The guideline, which will be applied to both ETFs and listed open-ended funds, will take effect from Feb 1.

The China Securities Regulatory Commission also released a guideline on Friday specifying higher requirements for ETF managers' capability, product operation and coordinated management with stock exchanges.

The guidelines were released amid the rapid expansion of the Chinese ETF market. Public information from the SSE showed the value of ETF products traded on the bourse surged 50 percent year-on-year to 900 billion yuan ($139 billion) by the end of 2020.

The total trading value of ETFs topped over 10 trillion yuan on the Shanghai bourse last year, among which 4.76 trillion yuan was contributed by equity ETFs.

According to market tracker Wind Info, over 90 percent of ETFs reported gains last year, with the median annual gain coming in at 27.4 percent.

ETFs investing in consumption, electric vehicles and defense industries showed the most robust growth last year.

An alcohol product-focused ETF issued by Shenzhen-headquartered Penghua Fund saw its value soar by 125.3 percent last year, reporting the highest annual increase among all ETFs in 2020.

The ETF targeting electric vehicles issued by Ping An Fund reported the second-highest annual increase of about 108.2 percent.

The new guidelines coincide with institutions' investment targets becoming highly concentrated. As TX Investment Consulting calculated at the end of last year, the top 50 stocks to which mutual funds devote a higher weighting were from the three industries of consumption, medicine and information technology.

By the end of 2020, up to 1,361 funds gave a large weighting to Kweichow Moutai among their products, holding a total position of 125.1 billion yuan in the company, up 54.2 percent from the previous quarter. The baijiu maker thus saw its share price rise nearly 20 percent in the fourth quarter of last year.

The market preference for industry leaders remains intact. Companies whose market value is above 100 billion yuan saw their share prices rise more than 5 percent so far this year, according to Wind Info.

The benchmark Shanghai Composite Index has also gained 3.4 percent so far this year, which can be attributed to institutions' similar investment targets, said industry experts.

Meng Lei, an A-share strategist at UBS Securities, said institutions' interest in certain companies might stay sustained and consistent in the short term.

"First of all, share prices are driven by companies' profitability. Industry leaders that outperform their peers in terms of profitability will remain the right investment target for institutions," he said.

Meanwhile, as more Chinese people's assets are directed from fixed-income products to stocks, institutions will work as the major channel linking these assets and the stock market.

Institutions will eye more inclination for companies with stable, relatively faster and clearer growth prospects, Meng said.