ETF Intensive Addition of Primary Dealers

Since the beginning of this year, trading of A-shares industry and thematic ETFs (Exchange-Traded Funds) has remained active. Large capital inflows have driven rapid growth in product sizes, and public fund institutions have accelerated the development of supporting systems for product operations. They have densely added primary traders (i.e., “subscription and redemption agency securities companies”) for their ETFs to expand redemption channels, improve liquidity, and ensure smooth trading. This has become an important trend in the refined competition within the ETF sector.

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

“Primary traders serve as a bridge connecting investors and fund managers, mainly responsible for handling ETF subscription and redemption applications 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, in an interview with Securities Daily.

“Adding new primary traders helps broaden ETF redemption channels, increase capacity and stability, and prevent processing delays during large-scale redemptions caused by congestion in a few channels,” Cui Yue explained. A smooth redemption process also helps ETF trading prices in the secondary market stay closely aligned with the fund’s net asset value (NAV), reducing significant premiums or discounts caused by redemption difficulties.

According to statistics, since the beginning of the 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 Venture 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 need for primary traders. Wind Info 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 for Securities Daily that broad-based ETFs tend to have large market capitalization and ample liquidity in their constituent stocks. In contrast, niche sector ETFs often focus on a single track, typically exhibiting layered liquidity among constituents and high concentration in redemptions and subscriptions. The 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 precision, optimize redemption basket structures in advance, and prepare core holdings to smooth out trading impacts caused by liquidity differences among 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 a market environment characterized by high volatility, high turnover, and large capital flows in 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, providing liquidity buffers through a pool of brokerages and capital strength to reduce drastic passive 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 new tracks and launching new products” to “focusing on liquidity, operational services, and customer experience.” With the dense addition of primary traders, has this become a core strategy for public fund institutions competing in the ETF market?

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