In recent years, China has witnessed remarkable growth in the scale of index-based financial products, leading to an increased influence within the domestic marketThis growth trajectory is indicative of a broader trend where investors are gravitating toward instruments that offer a more systematic approach to portfolio management.

The various categories of index-based products are expansive, including equity index products, bond index products, commodity index products, and othersEach category serves distinct market needs, but one of the most prevalent types is the equity index product, which seeks to passively track the performance of specific market indicesThis method of investing helps mitigate the investment risks associated with individual stocks by diversifying exposure across many securities.

The essence of equity index products lies in their passive management approach.

Unlike actively managed funds, which rely heavily on the expertise of fund managers for stock selection and market timing, equity index products primarily mimic the underlying index by investing in the same constituent stocks in proportion to their weights

This is typically achieved through three main strategies: full replication, sampling replication, and optimization replicationHowever, certain factors can lead to discrepancies between the net asset value of these products and the performance of the tracked index, known as tracking errorInvestors can manage tracking errors through various methods, such as comprehensive replication, choosing products with larger market caps, selecting lower-cost options, and utilizing optimized tracking strategies.

Equity index products have unique attributes that cater to different requirements.

These products vary significantly in characteristics, making them suitable for varying market conditions and investor objectivesThey possess several advantages over other actively managed funds, including higher efficiency, greater transparency, lower costs, and improved liquidityTypically, the average management fee for equity index products ranges below 0.5%, and custody fees hover around 0.1%, which are considerably lower than their actively managed counterparts

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The rapid rise of these products has paved the way for innovative offerings, such as the "Fixed Income +" product, which merges equity exposure with fixed income and has garnered a favorable response from consumersSince the beginning of 2024, "Fixed Income +" funds have experienced swift growth, boasting a benchmark return rate of 5.09%.

The development of equity index products by wealth management subsidiaries symbolizes a strategic evolution.

From a client perspective, traditional bank wealth management services no longer guarantee "capital protection" nor yield consistent returns, particularly given the persistent decline in money market fund yieldsThis shift has heightened investor demand for low-risk, stable-return productsMoreover, clients are increasingly focused on liquidity, risk profiles, and fee structuresPolicywise, the firm promotion of index-based products aligns with China's ambitions for inclusive finance, presenting wealth management firms with new opportunities to issue index products

From an investment standpoint, adopting index strategies offers a clearer investment directive and a broader range of choices, effectively minimizing the adverse impacts of human bias and emotional tradingFurthermore, firms can enhance their brand identity and optimize distribution channels through the standardized nature of index products, promoting collaborative avenues with various financial institutions.

Yet, the journey isn't without its challenges when comparing the development of equity index products through wealth management subsidiaries to mutual funds.

On the one hand, these subsidiaries enjoy several advantages; for instance, their submission processes are more flexible, the range of assets is broader, and they benefit from strong external supportConversely, weaknesses exist, including limited capabilities in constructing indices, lower risk appetites among clients, a stable expectation from their clientele, intense competition due to product homogeneity, and existing regulatory bottlenecks.

Looking ahead, the future success of equity index products will rely heavily on multifaceted strategies, as significant market potential remains untapped.

To build successful channels, wealth management subsidiaries must ensure transparency in their strategies and improve the ease of subscription and redemption

In terms of investment research, enhancing macroeconomic assessment and asset allocation capabilities will be vitalAdditionally, these institutions need to be vigilant regarding clients who may have fluctuating risk appetitesIn the long run, interest rates in China are likely to continue their downward trend, which will keep bank yields low and traditional wealth management products less attractive to investors seeking higher returnsMoreover, from both customer and market perspectives, there is considerable growth potential for equity index products managed by wealth management divisions.

Nonetheless, certain risk factors must be acknowledged:

These include unexpected market volatility, the possible resurgence of redemption waves, stricter regulations in bank wealth management, slower-than-anticipated implementation of index-based products, and more stringent oversight of index products.