ETF Intensive Addition of Primary Dealers

Staff Reporter Peng Yansong

Since the beginning of this year, trading of A-shares industry and thematic ETFs (Exchange-Traded Funds) has remained active, with large capital inflows driving rapid growth in product scale. Public fund institutions have also accelerated product operations and supporting system construction, densely adding primary traders (i.e., “subscription and redemption agency securities firms”) for their ETFs to expand redemption channels, improve liquidity, and ensure smooth trading. This has become an important trend in the current refined competition within the ETF sector.

On March 16, Huaxin Fund announced that starting immediately, China International Capital Corporation (CICC) has been added as the primary trader for seven of its ETFs, including Huaxin Bank ETF, Huaxin CSI 300 Enhanced ETF, and Huaxin Software ETF. On the same day, E Fund announced that Changjiang Securities has been added as the primary trader for its State Grid Equipment ETF.

“Primary traders serve as a bridge connecting investors and fund managers, mainly responsible for handling ETF subscription and redemption requests submitted by investors. Meanwhile, market makers in the secondary market focus on continuously providing bid and ask quotes to narrow the bid-ask spread and improve trading efficiency,” said Cui Yue, an analyst at Morningstar (China) Fund Research Center, to Securities Daily.

“Adding new primary traders helps broaden ETF redemption channels, increase capacity and stability, and prevent processing efficiency from declining during large-scale redemptions caused by channel congestion,” Cui Yue explained. A smooth redemption process also helps keep ETF secondary market prices more closely aligned with the net asset value (NAV) of fund shares, reducing significant premiums or discounts caused by redemption difficulties.

According to the reporter’s statistics, since the beginning of this year, more than ten fund companies including GF Fund, Guotai Fund, and Huaxin Fund have added primary traders for their ETFs. The involved brokerages include Guolian Minsheng Securities, Ping An Securities, First Capital Securities, Dongguan Securities, among others, covering a broad range of brokerages. Additionally, the overall scale of ETFs with newly added primary traders this year has exceeded 110 billion yuan.

Among ETFs, industry and thematic ETFs in niche sectors have an especially urgent demand for primary traders. Wind Information data shows that as of March 16, there are 637 industry and thematic ETFs in the market, with a total scale of 1.38 trillion yuan. Since the beginning of the year, net inflows have exceeded 220 billion yuan, with over 47.5 billion yuan net inflow in March alone.

Yang Delong, Chief Economist at Qianhai Open Source Fund, analyzed to Securities Daily that broad-based ETFs tend to have large-cap stocks with ample liquidity, whereas niche thematic ETFs often focus on a single sector, generally exhibiting features such as layered liquidity of constituent stocks and high concentration of redemptions and subscriptions. Stable operation of these products relies more heavily on primary traders.

To reduce operational impact costs, Yang Delong stated that primary traders can manage basket stocks with refined precision, optimize the structure of redemption baskets in advance, and prepare core holdings to smooth out trading impacts caused by liquidity differences among individual stocks. They can also leverage the dual regulation capability of subscription and redemption agency to use their own positions as buffers during concentrated redemptions, avoiding passive rebalancing by fund managers and significantly lowering impact costs.

In the context of high volatility, high turnover, and large capital flows characteristic of industry and thematic ETFs, the role of primary traders is especially critical. Yang Delong pointed out that primary traders mainly ensure smooth product operation through three measures: first, communicating and executing large redemption requests in stages to avoid sudden impacts on constituent stock prices; second, relying on liquidity buffers provided by the broker pool and capital strength to reduce forced drastic adjustments of fund positions; third, maintaining efficient coordination with fund managers, synchronizing market and redemption data in real time, and using arbitrage to suppress premiums and discounts, thereby preventing irrational redemption cycles.

Currently, competition in the ETF sector has shifted from “fighting for sectors and launching new products” to “focusing on liquidity, operational services, and customer experience.” With the dense addition of primary traders, has this already become a core strategy for public fund institutions competing in ETF products?

Cui Yue believes that adding primary traders may be one of the methods, but competition in ETFs is gradually extending to investor experience. Whether they can help investors better understand product features, make rational asset allocations, and whether they can provide consistently stable low fees and closely track indices are becoming increasingly important factors.