The financial landscape is witnessing a remarkable evolution as we transition into April, with a surge of new investment products hitting the marketNotable among these are the Tianhong Zhongzheng Hong Kong-Shenzhen Internet of Things Themed Connected Fund, the Morgan Zhongzheng A50 Connected Fund, and the Huaxia Zhongzheng Smart Choice 500 Growth Innovation Strategy Connected FundAs reported by Wind data, a total of 50 similar products have been launched this year alone, a significant increase from just 23 in the first quarter of the previous yearThis trend signifies the growing appetite among investors for innovative financial products aimed at capitalizing on emerging market themes and indices.

The rise of connected funds, which serve as a bridge between exchange-traded funds (ETFs) and investors, underscores a growing market demandAs asset management firms design ETF products, they are increasingly considering the simultaneous development of associated connected funds

This move enables investors, especially those without direct access to equity markets, to engage with ETFs in a more user-friendly mannerFor instance, Guotai Fund has highlighted that connected funds closely mirror the risk-return characteristics of their underlying ETFs, thus catering to small and medium-sized investors who lack a securities account.

The rapid expansion of connected funds has been welcomed by industry insiders, particularly from large public funds in Southern ChinaThey emphasize that the proliferation of these products has multiple benefitsBy reducing the barriers to entry—often allowing investments to start from as little as one yuan—more retail investors can participate in the marketFor fund companies, offering connected funds enhances their product lineup, catering to diverse investor needs and improving competitive positioningFrom a broader perspective, connected funds bolster the investor base for ETFs, helping to stabilize the capital markets and indicate a maturing investment ecosystem in China.

However, there are caveats to the growing popularity of connected funds

Despite their aim to closely track the performance of their associated ETFs, discrepancies can ariseMarket volatility, transaction costs, and the necessity to maintain a cash reserve of up to 10% can lead to differences in performance between connected funds and the ETFs they are designed to trackThis divergence underscores the necessity for investors to conduct thorough research and understand the nuances of these products.

Looking ahead, the future seems bright for connected funds amidst the continuing evolution of the ETF marketWith the rapid growth of ETFs and an increasing acceptance of passive investment strategies among investors, the demand for connected funds is poised for sustained growthMoreover, as the landscape becomes more competitive, public funds must enhance their product innovation and customer service to retain market relevanceFunds that track mainstream broad-based indices or possess distinctive value propositions are likely to stand out

For instance, connected funds focusing on high-interest indices or offering exposure to unique assets or overseas markets could leverage competitive advantages to attract investor attention.

The momentum behind ETFs reflects broader trends in passive versus active investmentThe proactive management strategy traditionally relied upon by fund managers—utilizing ground research, data analysis, and subjective judgment—has become increasingly challenged in what many are now identifying as a more efficient marketHistorically, the A-share market in China presented opportunities for generating alpha via active management, with many star fund managers rising to prominence based on their investment acumenYet, as informed market participants can quickly incorporate available information into stock prices, the conditions that once allowed active managers to outpace benchmarks are changing.

This situation mirrors developments in mature markets such as the United States, where over the past decade, 83% of actively managed large-cap funds have underperformed against the S&P 500 index

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The watershed moment came in 2019 when index fund assets overtook those of actively managed funds for the first timeThis trend signals a substantial shift in investor preferences and behaviors, evidencing a growing faith in the efficiency of indexed investments.

Despite the inherent appeals of passive strategies, some proponents of active management argue that there are cyclical opportunities within the market landscapeFactors such as institutional investment strategies that collectively favor certain stocks and the agility of smaller fund managers in adapting to shifting market conditions can create scenarios where active management might still offer valueHowever, whether institutions can maintain trust, and to what extent, remains debatableObservers note that a mature market thrives on diversity, and the complete replacement of active products with passive ones is unlikely even amidst growing competition and technological advancement.

In this dynamic context, the differentiation among passive products becomes crucial, especially in combating extensive competition

One representative from a public fund in Northern China suggests focusing on several strategic avenuesFirstly, aligning ETFs with national goals—particularly in the realm of sustainable investing (ESG)—can tap into a growing social consciousness surrounding the environment and corporate responsibilityThe rise of ESG-themed ETFs is anticipated as China embarks on its dual-carbon objectives.

Secondly, investments in foreign equity products are on the rise, driven by China’s interest rate movements and the appeal of high-tech sectors in emerging and developed marketsEnhanced access to international investment opportunities could signify a new phase of growth for cross-border ETFsLastly, there’s an increasing recognition of the need for ETFs designed to meet specific investor demandsFor low-risk investors, fixed-income ETFs may gain traction as a reliable vehicle; while for high-risk seekers, the exploration of combination ETFs that blend various asset classes may yield exciting opportunities.