In the world of investment, every subtle change may foreshadow a new trend in the market. As we stand at this moment filled with uncertainties, let us turn our attention to an investment tool that seems ordinary yet is full of power—Exchange Traded Funds (ETFs). It may very well be the main force leading this bull market.
Looking back at the history of the A-share market, each bull market has its unique liquidity vehicle. From the umbrella trusts between 2014 and 2015, to the public fund clustering from 2019 to 2021, each market frenzy has been accompanied by the rise of some dominant force. This time, ETFs are quietly becoming the focus of the market with their unique charm.
Perhaps you were once unfamiliar with the term ETF, and even when sharing this view with friends who have just opened an account, they would curiously ask about its meaning. However, it cannot be denied that ETFs are gradually changing the market landscape with their rapidly growing scale and influence.
From a data perspective, the growth rate of ETFs is astonishing. In October 2020, the total scale of ETFs in the market was only 1 trillion, and by August 2023, this figure had doubled to 2 trillion. Even more shockingly, by October 8th of this year, the total scale of ETFs had reached 3.8 trillion. This almost explosive growth has undoubtedly injected new vitality into the market.
The prominence of ETFs in the market is inseparable from their characteristic of passive investment. Compared to active funds, ETFs focus more on tracking a basket of stocks of a specific index or industry, allocated according to weighted proportions. This investment strategy not only reduces management costs but also enables ETFs to respond more flexibly to market changes.
As more and more funds flow into the ETF market, a subtle change begins to occur. Industry leaders with large market capitalization and good liquidity start to receive more attention. Since ETFs need to allocate stocks according to weighted proportions, these industry leaders are often heavily bought. This buying behavior not only raises the valuation of these stocks but also gives them a higher weighted proportion in the next index constituent adjustment.
The formation of this positive feedback mechanism further intensifies the strong performance of industry leaders. They not only gain more incremental funds but also gradually form a premium for ETF constituents. The existence of this premium causes the valuation of leading stocks to continue to rise until policy shifts or market bubbles burst.
However, this does not mean that the risks in the ETF market can be ignored. As more and more funds discover the market led by ETFs, the market may once again see clustering phenomena. Some fund managers of industry active funds, in order to obtain higher returns, will also start to imitate the investment strategies of ETFs, leading to further winner-takes-all among leading stocks.
Therefore, for investors, it is crucial to understand the role and influence of ETFs in the bull market early on. Only by choosing the right side can one get a share in this investment feast. Even if you have just learned about ETFs, or if you need to read this article again to fully understand the logic behind it, do not be discouraged. Because in this market full of uncertainties, every subtle change may become the key to your victory.
As one of the important tools of passive investment, ETFs are leading a new round of bull market with their unique charm. In this process, we must not only pay attention to the investment opportunities it brings but also be vigilant about its potential risks. Only in this way can we go further and more steadily on the road of investment.
- 24 June'24
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