On December 5, 2019, the Huaxia Feed Soybean Meal Futures ETF, commonly referred to as the Soybean Meal ETF, made its debut on the Shenzhen Stock Exchange, marking its fifth anniversary this yearThis ETF holds significance as the first commodity futures ETF listed in mainland ChinaOver the past five years, the Soybean Meal ETF has not only maintained a stable growth trajectory but has also demonstrated a relatively smooth operational performance.

Experts in the financial industry herald the Soybean Meal ETF as an innovative investment product characterized by its low correlation with stock and bond indicesEssentially, this allows it to augment traditional asset classes and offers investors a more comprehensive approach to asset allocationDespite these advantages, the Chinese commodity futures ETF market still has ample room for expansion in terms of size, variety, and sophistication compared to more developed foreign financial markets.

Revolutionizing Investor Asset Allocation

The approval of China’s first batch of commodity futures ETFs came on August 27, 2019, with Huaxia, Jianxin, and Dacheng Fund companies leading the charge

This initiative heralded a new era in modern public fund investments focused on commodity futuresJust a few months later on December 5, the Soybean Meal ETF began trading, followed by the Dacheng Nonferrous Metals Futures ETF on December 24, and the Jianxin Energy & Chemical ETF on January 17, 2020.

In terms of market capitalization, the Soybean Meal ETF is significantly aheadAs of the end of November 2024, data from Wind indicates that its asset size reached 2.724 billion yuan, showcasing a remarkable growth of over 900% since its inceptionThe number of ETF and linked fund holders has also surged to around 130,000 over the same period.

Primarily composed of commodity futures contracts, the Soybean Meal ETF aligns itself with the DCE Soybean Meal Futures Price Index, representing a distinctive alternative investment class beyond traditional equity and fixed-income products.

According to Su Yajing, an analyst in the Agricultural Products Department at Guolian Futures, “Commodity futures tend to exhibit a low long-term return correlation with traditional investment tools such as stocks and bonds, which makes commodity futures ETFs valuable for optimizing asset allocation for clients effectively.”

Specifically regarding the Soybean Meal ETF, a representative from Huaxia Fund noted the ETF's low correlations with stock and bond indices at 0.03 and -0.05, respectively

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This dynamic provides an effective complement to stock and bond investments, optimizing the asset allocation structure for investors, particularly pronounced during years of underperformance in the equity marketFor instance, in 2022 and 2023, as equity markets faced headwinds and bonds performed moderately, the Soybean Meal ETF generated returns of 62.23% and 10.53%, respectively.

Investment Returns Sharply Outpace Underlying Assets

The Soybean Meal ETF employs a passive management strategy, primarily based on the index's composition methodThis approach entails purchasing and holding component futures contracts of the underlying index—in this case, the lead soybean meal futures contract—to achieve investment objectivesThe remaining assets are mainly invested in high-liquidity fixed-income productsSimply put, the value of soybean meal futures contracts held by the ETF constitutes 90% to 110% of the fund's net asset value, with only about 10% of the fund actually used as margin due to the leveraged nature of futures trading, allowing the surplus to be directed toward money market funds and fixed-income products.

The returns of the Soybean Meal ETF break down into three parts: gains from price fluctuations in soybean meal, interest income, and roll yield

The price fluctuation gains derive from supply and demand dynamics within the soybean meal marketInterest income arises from investing non-margin capital in lower-risk yield-generating instrumentsHistorically, transactions in soybean futures often present a contango situation—where distant-month prices are lower than near-month prices—leading the ETF to typically conduct a strategy that sells near-month contracts while buying those further out during month-end transitionsThis practice contributes to roll yield, illustrating the investment value of the ETF itself.

It is noteworthy that differing market conditions and price structures among various commodities mean not every commodity futures ETF can reap roll yieldRoll yield exemplifies the investment appeal of the Soybean Meal ETF itself.

Over the past five years, the Soybean Meal ETF has realized significant excess returns relative to soy meal futures

According to the data provided by Huaxia Fund, as of November 29, 2024, the Soybean Meal ETF recorded a cumulative return of 89.83%, compared to just 1.67% for the lead soybean meal futures contract index, resulting in a staggering excess return of over 80%.

The representative from Huaxia Fund further noted that throughout the past five years, the ETF displayed stable operational performance, with net asset value increasing from 1 to a current level of 1.90, achieving nearly 90% cumulative returns, significantly outpacing stock and bond indices during the same timeframeThe annualized volatility of the ETF stands at 16%, which is higher than that of bond indices but lower than that of stock indices, generally reflecting a profile of high historical returns alongside moderately manageable risk.

Expanding Space for Commodity Futures ETFs

As China’s pioneering commodity futures ETF, the Soybean Meal ETF has catalyzed positive influences on the soybean meal futures market itself.

According to the Huaxia Fund representative, the Soybean Meal ETF has attracted a more diverse range of investors to this market, enriching the overall participation structure and, in turn, promoting market scalability

Operating through the mechanism of passively holding long positions also translates into a consistent influx of stable long capital, enhancing transaction efficiency for market participants that require hedging through selling.

In this way, the Soybean Meal ETF builds a “two-way bridge” between the futures market and individual investors by pooling dispersed funds from individual investors to participate in the futures market as institutional investorsThis benefits individual investors by providing a channel for low-risk participation in futures markets for broader asset allocation and enhances the liquidity supply within the futures marketplace.

Nevertheless, when compared to mature foreign financial markets, the Chinese commodity futures ETF landscape remains nascentThe representative pointed out that in advanced markets like the United States, commodity futures ETFs have become vital investment tools, with over 60 existing products totaling more than 20 billion USD in assets

These products span essential futures such as oil, natural gas, gold, copper, and wheat, including broader sector indices in energy, precious metals, and agriculture.

Moreover, innovation is more pronounced in U.Scommodity ETF operations; while passive investments dominate, actively managed commodity ETFs are emerging, along with leveraged inverse commodity ETFs carving their niche in the market.

In China, however, there are only three commodity futures ETFs, with a collective scale of around 3.8 billion yuan, while the majority of other products focus on tracking the spot price of gold.

Multiple market players assert that China has considerable growth potential in the commodity futures ETF domain regarding size, diversity, and product innovation in the future, which will support the broader goals of promoting inclusive finance and enhancing retirement finance.

Li Jiyue, an analyst of agricultural products at Shenyin & Wanguo Futures, emphasized that the populated U.S