The onset of defensive thinking in the financial markets has led to a significant slowdown in stock accumulation for newly launched exchange-traded funds (ETFs) at the beginning of the year.
Recently, a notable trend has emerged among several ETFs focusing on high-growth sectors, such as chips, military technology, electric vehicles, and the Star MarketSeveral of these funds are adopting a more cautious approach to stock accumulation, with some high-volatility ETFs refraining from any stock purchases prior to their official trading debut.
Market strategists suggest that, in the short term, valuations have reached high levels and will require some time to consolidateThe lack of a dominant trading theme in the market and the profit-taking pressure resulting from last year's substantial gains seem to suggest that choppy market conditions could persist until the Lunar New Year.
The shift from rapid to slow accumulation in new ETF funds
The previously common phenomenon of rapid stock accumulation before the launch of high-volatility sector ETFs has virtually disappeared.
On January 7, Yongying Fund announced that its Yongying Guozheng General Aviation Industry ETF had a stock position of less than 3% just a week before its scheduled launch on January 10, 2025. As of January 3, this ETF primarily invested in companies like Wanfu Aowei and Hongdu Aviation within the military sectorSimilarly, the Cathay Innovation Board 50 ETF, which will also be launching on January 10, has seen a slow accumulation, with its stock position not exceeding 5% as of January 3 according to Cathay Fund's announcement.
A cautious investment strategy is equally evident in the booming chip sector as observed in 2024. The Focused Fund Shanghai Stock Exchange Science and Technology Innovation Board Chip ETF, scheduled to launch on January 9, 2025, reported that its stock holdings totaled only about 5% as of January 2, with investments in companies like Cambricon and Haiguang Information.
The extreme caution in strategy can also be seen in the near-term approach towards the new energy vehicle sector
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The Huaxia CSI Hong Kong Stock Connect Automotive Industry ETF is set to officially launch on January 8, 2025, but maintains a stock position of zero just seven days ahead of going live.
Profit-taking in high-volatility sectors may prompt institutional investors to rebalance their portfolios
The cautious positioning strategy deployed by fund managers following the end of the year-end market surge is not without rationale; the booming market in the latter half of 2024 has increased pressures for institutional investors to rebalance their holdings.
Take the Focused Fund Shanghai Stock Exchange Science and Technology Innovation Board Chip ETF as an example: with only 5% in pre-launch stock assets, it is focusing on one of the hottest sectors of the prior year, where giants like Haiguang Information had been favored by active equity fundsNotably, Morgan Stanley's Digital Economy Fund enjoyed a spectacular gain of 69% overall in 2024, largely due to a research-driven concentration on such stocks.
However, post-year-end adjustments have intensified the pressure on those tightly grouped favorite stocksHaiguang Information, once a darling among funds, has recently faced a staggering six consecutive dropsIn contrast, Cambricon, which saw its stock price surge 387% last year, led to cautious allocation from the Focused Fund Shanghai Stock Exchange Science and Technology Innovation Board Chip ETF, which only tentatively allocated less than 0.6% to this stock prior to its market listing.
Furthermore, military-themed funds have again hit the bottom of the charts since the year's start, a reflection of the sluggish stock prices in this sector
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This scenario explains the cautious accumulation approach employed by the Yongying Guozheng General Aviation Industry ETFData from Wind reveals that, among the worst-performing funds of the year thus far, several are military-themed products, and the China Aviation Fund’s military-civilian integration fund lost nearly 10% over just three trading days following the new year.
For the electric vehicle ETF maintaining a zero equity position just a week ahead of its listing, the cautious sentiment could stem from anticipated price wars in the sectorAs 2025 dawns, with policy-driven incentives gradually waning, many industry insiders predict a fresh wave of price competition will sweep through, likely presenting significant new hurdles for major playersRelated regulations that provide subsidies for trade-ins expired on December 31, 2024, further intensifying fund managers’ focus on the stock price fluctuations in the new energy vehicle sector.
Institutional funds are favoring defensive sectors in short-term strategies
The shifting dynamics between growth and dividends may lead these ETFs to be conservative in their allocations to high-volatility areas, prompting many fund managers to prioritize defense strategies.
A representative from Great Wall Fund conveyed to Securities Times that the current A-share market requires patience for catalysts, and in the short term, the market may stay in a turbulent state absent further triggersValuations have reached elevated levels that necessitate digestion timeThe fundamentals of technology growth stocks are now largely reflected in their prices, suggesting a potential for sector-wide differentiation and adjustment in the near future.
“In the near term, trading themes are lacking, and volatility may persist until the Lunar New Year,” emphasized the Great Wall Fund spokesperson
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Historical trends typically show that January often lacks momentum, and with this January welcoming the inauguration of the new U.SPresident, a focus on reduced volatility and risk may be the more prudent investment approach, with expectations of new catalysts leading to a trend in February likely on the horizonHistorically, January tends to favor large caps over small caps with a balanced stance between growth and valueFor observable improvements in large-cap styles and returns, two conditions need to be met: an economic uptick (or positive expectations) and expedited state-owned enterprise reforms—expectations for large-cap styles to start manifesting might set in from March 2025, pending data validation.
It is noteworthy that numerous fund companies have underscored a short-term focus on dividend-based investments post-year-end, elucidating the slow stock accumulation seen in military, chip, innovation board, and new energy ETFs.
Great Wall Fund reiterated that within the current investment landscape, there's a pressing need to prioritize risk aversion, looking towards lower valuation targets within the CSI 300 while also focusing on sectors that lack immediate fundamental recovery, such as specific industries in a reporting cycle at their nadir, with limited potential for further declines—these include panels, printed circuit boards, consumer electronics components, meat products, chemical agents, pharmaceutical raw materials, battery chemicals, and construction machinery, which collectively lend strong defenses towards dividend assetsAdditionally, a certain market pullback might be necessitated in the short run, augmenting the defensive nature of dividend-driven sectors.
Interestingly, even a top-performing fund like Morgan Stanley, which recently dominated in high-volatility sectors, acknowledges the imperative of capitalizing on dividend assets during this climate
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