As we enter the Year of the Snake, the bond market continues to thrive, showcasing a robust and dynamic landscapeDespite earlier fluctuations influenced by funding conditions that caused short-term bonds to retract, 2025 appears promising for the fixed-income sectorWith interest rates currently low, the liquidity and trading demand for bonds are seeing a significant uptick, leading to heightened market activity and a more bustling trading environment.

In the previous year, the rapid expansion of Exchange-Traded Funds (ETFs) drew passive investment strategies into the bond sector, culminating in the introduction of the first credit bond ETF fundsToday marks a notable event with the launch of Xia Xia's Credit Bond ETF (511200). This development signals a shift in investment strategies within the bond market, meriting a closer look at its distinct features and implications for investors.

01 What is a Credit Bond ETF?

To understand the Credit Bond ETF, it's essential first to explore the concept of bond ETFs

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Like all ETFs, bond ETFs are open-ended funds that trade on stock exchanges, pooling together various bond assets to track a specific bond indexWhen investors buy or sell bond ETFs, they essentially engage in a transaction based on a collection of bonds, thereby facilitating broader investment opportunities in the bond market.

In the current domestic market, bond ETFs have diversified into three main categories based on the underlying bond attributes: interest rate bond ETFs, credit bond ETFs, and convertible bond ETFsEach of these ETF categories caters to different investor preferences and risk appetites.

Delving deeper into the Credit Bond ETF, it can be classified based on the issuer profiles into industry bond ETFs and municipal investment bond ETFsInvestment types within credit bonds further delineate them into short-term corporate bonds, etc

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The Credit Bond ETF portfolio typically encompasses a variety of issuers and sectors, offering effective risk diversification.

02 Why Should Investors Focus on Credit Bond ETFs Now?

In 2024, high-dividend equity assets have drawn substantial attentionDespite a slight withdrawal from extreme concentration, the initial peak in capital allocation has prompted institutional investors to pivot towards credit bonds as an alternative investment avenueCredit bonds provide the dual benefits of returns exceeding deposit and government bond rates while significantly curtailing the high volatility and associated risks generally correlated with equity assetsMoreover, from a credit risk standpoint, the current debt mitigation framework suggests that the credit risk is relatively controllable, positioning credit bonds as an attractive investment opportunity.

The growing focus on the interest bond market, paired with historically low yields, suggests a potential dampening of the demand to accumulate more interest bonds

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Observational trading patterns indicate that leading bond market players are likely to shift greater focus towards credit bonds, with high-grade corporate bonds poised to emerge as the 'leading' category benefiting from liquidity influx.

When comparing the features of various bond asset classes, it's evident that Credit Bond ETFs are more suited for retail investorsGiven the lower yields of interest rate bonds, investors often need to employ frequent, short-term trading strategies to enhance returns, a tactic requiring a higher trading competency from retail investorsConversely, high-grade credit bonds exhibit features of higher yields and flexibility, making them amenable to infrequent tradingThis accessibility allows retail investors with limited time to engage in the bond market to reap its benefits effectively.

03 What is the Risk-Return Profile of the Tracking Index?

The Credit Bond ETF (511200) tracks the Shanghai Stock Exchange's benchmark corporate bond index

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Historical performance data indicates that this index has surpassed the average returns of medium and long-term pure bond fundsSince its inception date (June 30, 2022, to December 31, 2024), the benchmark corporate bond index has recorded a cumulative gain of approximately 11.12%, outperforming the Wind medium to long-term pure bond index, which yielded 9.18% over the same period.

When juxtaposed with major credit bond indices, the Shanghai benchmark corporate bond index demonstrates a risk-return characteristic positioned between short-term financing and municipal investment bond indicesSince its initiation, this index's annualized volatility has been approximately 4.42%, with a static yield of 1.97% at the end of the selected periodFor context, the annualized volatility for the short-term financing index was around 2.74% with a static yield of 1.85%, while the municipal investment bond index reflected a higher annualized return of 5.44% with a static yield of 2.21%.

Ultimately, the current stage of the bond market reveals growing complexity amidst fluctuating conditions

The Shanghai benchmark corporate bond index offers appealing investment value by presenting low interest and credit risk profiles.

04 What are the Characteristics of the Index Components?

A significant focus on central state-owned enterprises provides control over credit risk.

The tracking index of the Credit Bond ETF (511200) is composed of over 50% of central state-owned enterprise bonds, with local state-owned enterprises making up more than 40%. Notably, only one bond from a private enterprise is presentThe index also reflects a broad industry distribution, with comprehensive enterprises making up 28.88%, predominantly clustered in non-financial sectors.

High credit ratings are prevalent, with low default risks.

All issuance subjects within the index are rated AAA

A significant 81.56% of the underlying bonds hold AAA ratings, with over 94% of implied ratings falling at AA+ and above, showcasing strong credit quality.

Short to medium duration characteristics ensure robust investment strategies.

The components of the benchmark corporate bond index cover various maturities, establishing a comprehensive yield curveThe index features a modified duration of 3.99, showcasing predominantly short to medium credit bond characteristicsLower durations imply reduced susceptibility to price volatility resulting from interest rate changes, aligning well with conservative investment requirementsFurthermore, in a declining interest rate environment, such bonds present opportunities to capture gains resulting from reductions in risk-free rates and spread compressions.

05 What Distinguishes Credit Bond ETFs?

In summary, the Credit Bond ETF (511200) boasts six notable advantages:

1. High trading efficiency: The T+0 trading structure contrasts with typical bond fund’s T+2, enhancing transaction speed and capital turnover.

2. Low holding costs: No subscription or redemption fees are applied, with management and custody fees conveniently peaking at only 0.2%.

3. High-credit quality: Underlying assets carry the highest AAA rating with a strong backing from central state-owned enterprises, ensuring lower credit risk.

4. Strong liquidity: Compared to existing credit bond ETFs, the benchmark market-making mechanism enhances overall liquidity and market pricing efficiency.

5. Risk diversification: The passive investment model spreads risk across a basket of bonds, minimizing individual bond impacts on the investment portfolio.

6. High cost-performance ratio: Featuring short to medium duration traits, the Credit Bond ETF remains appealing for investors seeking low interest and credit risks amidst turbulence.

For those eyeing fixed income assets and aiming for steady returns, the Credit Bond ETF (511200) is an excellent choice

Additionally, its T+0 trading structure accommodates trading-focused investors, allowing for more versatile and dynamic investment strategies.

06 Choosing ETF Investments with Huaxia Fund

Huaxia Fund has built a robust debt research frameworkSince the inception of the Chinese credit bond market in 2006, Huaxia initiated its credit research team concurrently, emerging as one of the first fund companies to establish a credit research team and develop a rating system.

Purchasing ETFs is best done with market leadersBeginning with the establishment of China's first ETF – the Huaxia Shanghai Securities 50 ETF – Huaxia Fund has amassed over 20 years of comprehensive index fund management expertise