While issues still exist within the Chinese exchange-traded fund (ETF) market, such as a lack of investor education and a less-diversified product suite, investors have shown growing interest in the market, with growth in this sector surpassing that of more developed markets like the US.

Since the launch of the first batch of ETFs tracking the Science and Technology Innovation Board (STAR) 50 Index last year in September, this sector has been gaining traction among investors, recording more than 100 billion yuan (US$15.5 billion) in subscriptions.

Four ETFs that were listed on the Shanghai Stock Exchange in November saw their assets under management (AUM) increase by more than 20% within a week. As of end 2020, China AMC, with AUM of 12.46 billion yuan, is the largest STAR 50 ETF.

The overall Chinese ETF market, which experienced a boom in 2018, entered a golden era of development last year reflecting investors increasing demand for such products.

The rising awareness of fund allocation is driving the development of ETFs, making them more popular among individual investors, according to a recent report on Chinese ETF investors launched by China International Fund Management, J.P. Morgan Asset Management and Xueqiu (Snowball), a Chinese equity and finance social media network.

Currently, Chinese ETF investors favour equity ETFs, according to the report, with 80% of retail investors allocating to this asset class. Factors like investment prospects, fund size and fee rates are the major criteria for individual investors when selecting products, while institutional investors focus more on underlying assets, investment prospects, fee rates and liquidity.

ETFs with thematic or smart-beta strategies are still not as popular as broad-based ETFs among Chinese retail investors, but this also reflects the fact that the ETF market in China is still in its early stages of development and the previously mentioned lack of investor education.

However, the strong momentum in the ETF asset class is expected to continue, according to the report, as the market develops and even more investors decide to allocate capital to this sector. The report also finds Chinese investors have a growing interest in overseas ETF products, with 30% of individual investors planning to allocate to overseas ETFs in the future, majorly focusing on equity ETFs.