China’s exchange-traded fund (ETF) market is at a critical inflection point. After peaking at over 6 trillion yuan ($840 billion) in late 2025, the industry is expanding beyond passive index tracking into active management.
Flagged by China Securities Regulatory Commission Chairman Wu Qing in June, the impending pilot of active ETFs represents a structural evolution for the major Asian ETF market.
However, the success of this innovation partly hinges on resolving a fundamental transparency paradox: balancing the secrecy required for market-beating returns with the transparency demanded by China’s market structure.
Trend-chasing trap
Driven by aggressive expansion, Chinese fund companies have increasingly fallen into trend-chasing behavior. The market is plagued by the herd issuance of popular thematic indexes and duplicated products tracking narrow sectors. This has led to an inflated market size masking an underlying fragility, where some products have degenerated into illiquid mini-funds.
For regulators, introducing active ETFs is a strategy to break this cycle. It is designed to steer mutual fund managers away from competing purely on product issuance and marketing channels, encouraging them to compete on investment research and long-term active management.
Strategic trade-offs
At its core, an active ETF marries the investment philosophy of a traditional, off-exchange active fund with the operational mechanics of an ETF. But unlike passive ETFs or enhanced index ETFs — which must hold at least 80% of their noncash assets in benchmark constituents or alternative stocks — active ETFs untether fund managers from constituent constraints, allowing more freedom in asset allocation.
Simultaneously, active ETFs solve several structural inefficiencies of off-exchange active funds. Through in-kind subscription and redemption, active ETFs reduce the cash drag and portfolio disruptions caused by large daily capital flows. Furthermore, they offer intraday liquidity and potentially lower overall costs. However, this structure brings new strategic challenges.
Exposed ‘bottom cards’
Traditional active management relies on keeping strategies confidential, whereas ETFs demand transparency. Under the new Shanghai and Shenzhen exchange guidelines, active ETF managers must publish a portfolio composition file daily before the market opens.
This daily unmasking of the fund’s “bottom cards” introduces market gaming risks. Rivals can copy the portfolio, while quantitative funds might front-run trades if they detect a manager gradually building or exiting a position.
To mitigate this, regulators have established strict guardrails. Portfolios must hold at least 30 securities, the top 10 holdings cannot exceed 60% of the net asset value, and underlying stocks must rank in the top 80% of all stocks listed on their respective exchanges by average daily trading volume over the past year.
These rules will likely dictate the stylistic future of China’s first generation of active ETFs, shaping them into large-cap, diversified, and low-turnover allocation tools rather than highly concentrated, high-turnover thematic bets.
Wall Street playbook
While the global active ETF market has ballooned to about $2.5 trillion, mimicking Wall Street is not a viable option for China. In the U.S., concerns over strategy leakage were partially alleviated by regulatory approvals of semi-transparent or non-transparent ETFs, which utilize proxy portfolios or other mechanisms to obscure actual holdings from the public.
However, China’s market structure prohibits this opacity. China operates on a “T+1” trading mechanism alongside daily price fluctuation limits, and it lacks granular, standardized individual stock hedging derivatives.
If an active ETF in China were to use a semi-transparent proxy portfolio, market makers would be essentially flying blind.
Therefore, total transparency in China is not only a regulatory preference, but also a structural necessity to ensure market makers can confidently price and hedge ETFs intraday.
Looking ahead
The impending launch of active ETFs in China will be far more than a simple product addition. It will bridge the traditional division between active investment research and passive ETF operations.
Fund managers will soon have to weigh every active trade against the market signaling it creates. Ultimately, active ETFs will serve as a comprehensive stress test, rewarding fund companies that can successfully synthesize investment research, precise ETF operations and disciplined liquidity management in a fully transparent arena.
Contact editors Jonathan Breen (jonathanbreen@caixin.com) and Lin Jinbing (jinbinglin@caixin.com)
