Ping An bets on bond ETFs to catch up as Vanguard draws near

Ping An Insurance (Group) Co. is expanding its range of bond ETFs as it tries to catch up in the fast-growing exchange-traded-funds market, while facing stiffer competition from global giants like Vanguard Group.

The Chinese financial conglomerate, which only offered its first ETF in late 2017, is targeting China's less-developed market for bond ETFs as vehicles that track broad indexes become more competitive given the dominance of large funds that were launched by local managers as early as 2004. The firm will start to offer products tracking shorter-dated government bonds and is also considering cross-market funds, said Cheng Jun, the head of ETF investments at Ping An Fund Management, in an interview.

While low fees and support from its parent company has helped Ping An Fund Management become the largest local bond ETF issuer, its current standing — about 16 billion yuan ($2.3 billion) across nine funds — lags Ping An's ambitions and is a fraction of the almost $1 trillion Vanguard oversees in the U.S.

"We're certainly not happy with the number," Mr. Cheng said. "We need to do more and we're planning to."

Vanguard, which doesn't yet have a license to offer onshore fund products, earlier this month formed an investment advisory joint venture with Jack Ma's Ant Financial, paving the way to bring its low-cost funds to China and tap rising demand for passive investments. BlackRock, the world's largest ETF issuer, won a Chinese private fund license in 2017 and has been offering products to qualified institutions and high-net-worth individuals.

Ping An's funds unit is also raising an ETF tracking stocks specializing in artificial intelligence. It has submitted applications for five other products, including two tracking local government bonds and one tracking new-energy-vehicle companies.

China's ETFs more than tripled in the past five years to $87.8 billion in assets as of March 31, according to data compiled by Bloomberg. Bond ETFs account for just 1% of the market, compared to 37% for stock ETFs and 60% for money-market ETFs, according to a report by Howbuy Wealth Management Co. last month.

That creates potential demand as insurers and pension funds shift away from just relying on money managers to pick stocks and bonds, Mr. Cheng said.

Still, Chinese institutional investors have only a "rudimentary" understanding of bond ETFs, and few insurers are invested in the market, Mr. Cheng said. Banks, which are major bond holders via the interbank market, are constrained by a lack of clarity on whether they can buy bond ETFs, as well as their own risk controls that prevent exposure to some underlying credit securities, he said.

In Hong Kong, where about 90% of existing ETFs track local and mainland stocks, Ping An is seeking to diversify into multiasset-class products, global equities and smart beta funds that seek to generate market-beating returns, rather than "plain vanilla products," according to Mona Chung, head of ETF and cross asset at Ping An of China Asset Management (Hong Kong).

"There's room for niche products in Hong Kong," Ms. Chung said in a separate interview. "While alpha ETFs are more difficult to understand, and therefore take us longer to grow assets under management, we want to do it right."

Like Vanguard, which over the past decade has more than tripled its ETF market share in the U.S. by slashing fees, Ping An has sought to attract investors with rock-bottom prices. Its fund tracking ChiNext startup stocks in February offered a management fee of just 0.15%, a quarter of the average of rival products.

"With increasing use of quantitative methods that save human labor and the growing size of the funds, your base number grows and that makes lower fees more and more feasible," Mr. Cheng said. "We're heading in that direction as well."