High-demand, high-performing ETFs frequently split shares, and NAV “discounts” help small investors get on board

Securities Times reporter Zhao Mengqiao

Recently, multiple public funds have issued announcements in quick succession, stating that they will conduct share splits for their respective themed ETF products.

From the secondary market perspective, as popular technology sectors such as semiconductors continue to surge, many ETFs’ net asset values (NAVs) have already doubled within the year. Some analysts have pointed out that share splitting can lower the per-trade execution threshold to around 100 yuan, which also more clearly reflects that, amid intensifying homogenized competition in the ETF market, fund companies are fighting a “liquidity defense” battle through more refined operations.

Multiple ETFs conduct share splits

Recently, announcements from several public fund companies have detailed the share-splitting of their ETF products. On July 7, Huaxia Fund announced that its Huaxia Guozheng Semiconductor Chip ETF had conducted a fund share split on July 6 (the share-splitting rights registration date), with a split ratio of 1:2. Before the split, the NAV per share was 2.9994 yuan; after the split, the NAV per share became 1.4997 yuan. Including the aforementioned product, Huaxia Fund’s ETFs involved in splits mainly total six, with the rights ex-effect taking place in two batches in the near term. On the same day, Bosh i Fund also announced that its semiconductor ETF—Bos hi shares—will be split at a 1:5 ratio, with the rights ex-dividend date for the share split set for July 13.

In the exchange-traded market, the minimum trading lot is 100 shares. After NAVs keep rising, the required capital to buy one lot increases accordingly, which will affect some ordinary investors involved in systematic investment plans (SIPs) and those making small allocations. After the split, the NAV falls back to a low level, and investors can enter with around 100 yuan, lowering psychological and capital thresholds.

In addition, share splitting can also optimize exchange-traded liquidity and narrow the discount/premium. Huaxia Fund stated that after the total share quantity increases by a multiple, the buy and sell order book becomes denser and trading slippage becomes smaller. At the same time, the units for creations and redemptions in the primary market are adjusted accordingly, reducing capital occupied by market makers’ arbitrage; arbitrage behavior becomes more active, the fit between ETF prices in the secondary market and the tracking index improves, and discount/premium fluctuations are smaller.

A sales person at a northern China fund also said that in some popular narrow-based industry ETFs or cross-border ETFs, because the underlying index’s volatility is relatively high, investors trade frequently. Whoever can provide the smoothest trading experience and the lowest threshold can capture the largest share of trading-type funds amid rapidly changing markets. Therefore, conducting share conversions in a timely manner has become a standard defensive tool for fund companies to maintain the market position of their core products, and it is also an offensive weapon for newly launched products to overtake at the curve.

“Finally, share splits can adapt to refined trading needs. Low NAV and multiple shares are better suited for grid trading and for batch add-on and reduce positions, allowing investors to adjust their holdings more flexibly. In a high-NAV situation, the fluctuation amount of 100 shares is larger, and small-scale rebalancing operations are harder.” Huaxia Fund said.

Concentrated in popular high-performing funds

Looking across a longer period since June, including ETFs recently implemented for splits by Huaxia Fund, Guotai Fund, GF Fund, and China Merchants Fund, most are products that previously delivered strong performance, have accumulated higher NAV, or are based on underlying assets with higher prices. They largely concentrate in sectors that have performed well this year, such as semiconductors and communications.

As mentioned above, Huaxia Guozheng Semiconductor Chip ETF’s gain within the year is as high as 72.34%, and Bos hi Semiconductor ETF’s rise is even as high as 112.67%. As of July 8, Bos hi Semiconductor ETF’s price in the secondary market was 4.766 yuan. If split at a 1:5 ratio, it would be under 1 yuan, meaning the value per lot would be less than 100 yuan.

Currently, the secondary-market NAVs of multiple chip and semiconductor ETFs have climbed to high levels. For example, Southern China’s STAR Market Chip ETF rose to 5.04 yuan; NAVs of Bos hi STAR Market Chip ETF, GF STAR Market Chip ETF, and Hu’an STAR Market Chip ETF are all above 4 yuan. However, although the fund performance is impressive, many funds still see share counts decline—for instance, a northern China fund’s STAR Market themed ETF saw its share count decrease by 3.61B shares within the year; another fund in northern China’s chip themed ETF also fell by 118 million shares.

Some analysts have pointed out that, unlike institutional investors who often deploy capital at tens of millions of yuan or more, individual investors’ funds are relatively scattered and more sensitive to absolute price. After splitting, the per-unit price of the ETF becomes lower, which not only reduces capital occupation for each trade, but also greatly facilitates capital planning for SIP participants. Although retail funds per transaction may be small, when aggregated they become the most active trading force in the ETF secondary market. Introducing this “fresh liquidity” can significantly raise the product’s average daily trading value and turnover rate.

Competing for ETF product liquidity

Behind ETF share splits is also the public funds’ high emphasis on ETF product liquidity. Although the total scale of China’s ETF market keeps hitting new highs, and broad-based ETFs have repeatedly produced “giant” products, in terms of trading volume, capital inevitably concentrates on top products. In many sub-sectors, typically only the largest-scale two or three products with the best liquidity can survive and generate profits; the rest struggle below the break-even line. Many ETFs under smaller and mid-sized public funds see little demand, their scale keeps staying sluggish, and some even face the risk of liquidation.

Just as of July 8, 嘉实嘉 security (information security) ETF’s turnover rate reached 46.49%. Turnover rates for products such as Huabao’s oil ETF and 易方达’s innovation energy ETF were also over one-third. Several technology ETFs’ single-day trading values exceeded 1 billion yuan. In addition, more than 30 themed products saw single-day trading values of only less than 1 million yuan. Recently, some ETFs have also encountered liquidity shortages due to their small scale, and in the secondary market their prices repeatedly face awkward situations of sharp ups and downs.

Therefore, many public funds are increasing securities firms as market makers for their ETFs in hopes of improving liquidity. Only on July 7, products under Tianhong Fund, Southern Fund, China Merchants Fund, and others newly added main market-making services from companies such as China Merchants Securities and Guoxin Securities.

“A now ETF market has moved from the past ‘land grab’ into the second half of ‘close-quarters fighting.’” An observer from a public fund in East China said. With product deployment largely completed, the focus of fund companies has shifted to refined operations. Such refined operations are reflected in all aspects: from lowering management fees and custody fees on the front end, to increasing off-exchange-linked funds and expanding distribution channels in the mid end, and then to introducing multiple market-maker mechanisms and implementing share splits on the back end. Splitting shares is one of the important tactics for fund companies to differentiate themselves and enhance customer experience among otherwise homogeneous products.

(Editor: Xu Nannan)

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