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2024-06-30

How "Core" is the "Core Broad-based Index"?

Recently, the A-share market has been showing signs of recovery and improvement, leading many investors to choose to enter the market through "funds." ETF products have become popular among investors due to their broad coverage, strong market representation, and diversification benefits. Previously, the Central Financial Office and the China Securities Regulatory Commission jointly issued the "Guiding Opinions on Promoting Medium and Long-term Capital into the Market," which pointed out the need to enrich the types of assets that public funds can invest in, establish a fast-track approval channel for ETF index funds, and continuously increase the scale and proportion of equity funds. Against this backdrop, ETF products may continue to be "attractive."

Currently, there is a large number of ETFs in the domestic market. Based on the types of indices they track, ETFs can be categorized into broad-based index ETFs, industry ETFs, thematic index ETFs, strategy index ETFs, and bond ETFs. It is worth noting that recently, ETFs tracking core broad-based indices have been particularly favored, with the scale of several core broad-based index ETFs exceeding 100 billion yuan.

So, the question arises, what are the core broad-based indices, and why are ETFs tracking these indices worth paying attention to?

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I. The Five Core Broad-based Indices with "Different Roles"

The market indices that investors are familiar with mainly include the Shanghai Composite Index and the Shenzhen Component Index. By sorting stocks by market value and then selecting stocks in segments to "combine" them, one can obtain large, medium, and small cap indices that reflect the overall performance of stocks within different market value ranges.

Among broad-based indices, the common large-cap indices are the SSE 50 Index and the CSI 300 Index. The SSE 50 Index is composed of the 50 most representative securities with large scale and good liquidity in the Shanghai market, comprehensively reflecting the overall performance of leading enterprises with large market value and good liquidity in the Shanghai market. The CSI 300 Index is composed of the 300 largest, most liquid, and most representative securities in the Shanghai and Shenzhen markets, reflecting the overall performance of listed company securities in the Shanghai and Shenzhen markets.

In the mid-cap index category, the CSI 500 Index is composed of the top 500 stocks by total market value after excluding the constituent stocks of the CSI 300 Index and the top 300 stocks by total market value from all A-shares, comprehensively reflecting the overall performance of listed company securities of mid-cap stocks in the Shanghai and Shenzhen markets.

By merging the constituent stocks of the CSI 300 Index and the CSI 500 Index, one can obtain the CSI 800 Index, which covers a wide range from large to medium-sized enterprises.

In the small-cap index category, the CSI 1000 Index selects 1,000 securities with small scale and good liquidity outside the sample of the CSI 800 Index as the index sample, which can comprehensively reflect the overall performance of listed company securities of small-cap stocks in the Shanghai and Shenzhen markets.In short, the constituents of these indices cover stocks across different market capitalization ranges, reflecting the overall performance of stocks in those ranges. ETF products that track these different indices hold the constituents of the indices they follow, so investors can invest in different ETFs to gain exposure to stocks across various market capitalization ranges.

II. Why are the "core broad-based indices" such as the CSI 300 favored?

From the perspective of constituent industries, since listed companies in different industries have different market capitalization ranges, the industries emphasized by large-cap, mid-cap, and small-cap indices also differ.

The CSI 300 index essentially covers all major industries, and its industry weight distribution will be "updated and iterated" along with the adjustment of the industry structure of domestic market-listed companies. As of October 17, 2024, according to the Xinhua Finance Level 1 industry classification, the banking, non-bank finance, food and beverage, electronics, and power equipment industries rank among the top five in terms of industry weights in the CSI 300 index, with weights of 12.36%, 10.98%, 10.32%, 8.86%, and 7.91%, respectively.

Unlike the CSI 300 index, as of October 17, 2024, the constituents of the CSI 500 index are more focused on high-growth emerging industries such as high-end manufacturing and technology, with biotechnology, power equipment, electronics, non-bank finance, and non-ferrous metals being the top five industries by weight in the CSI 500 index, with weights of 10.31%, 10.27%, 8.74%, 7.66%, and 5.84%, respectively.

Additionally, the CSI 1000 index, which focuses on small-cap stocks, exhibits characteristics different from those of the CSI 300 and CSI 500 indices.

Looking at the distribution of industry weights, the CSI 1000 index has a higher proportion in industries such as biotechnology, electronics, computers, power equipment, and basic chemical industries, with these five industries accounting for 12.43%, 12.25%, 8.52%, 7.38%, and 6.26% of the CSI 1000 index, respectively. It is evident that the CSI 1000 index places more emphasis on small and medium-sized high-tech enterprises that represent technological innovation and the transformation and upgrading of demand.

The CSI 300 index is the first comprehensive market index in China that reflects the markets in Shanghai and Shenzhen, while the constituents of the CSI 500 index are more focused on high-end manufacturing and technology sectors, which are high-growth emerging industries. The CSI 1000 index has a higher proportion in emerging industries such as industry, information technology, and raw materials. In other words, the constituent stocks of the CSI 300, CSI 500, and CSI 1000 indices differ in scale and industry focus, which is why these three indices are considered important "core broad-based indices."

ETFs that track the CSI 300, CSI 500, and CSI 1000 indices are thus referred to as "core broad-based ETFs" and have gained favor with investors. Taking the ETFs that track the CSI 300 index as an example, the scale of Huatai-PineBridge CSI 300 ETF recently exceeded 400 billion yuan for the first time, setting a historical record. At the same time, other products that also track the CSI 300 index, such as E Fund CSI 300 ETF, China AMC CSI 300 ETF, and Harvest CSI 300 ETF, all have scales exceeding 100 billion yuan.

Recently, on the policy front, regulatory authorities have issued a series of incremental policies involving finance, consumption, investment, and the stock market, accelerating the release of policy dividends in the capital market, significantly improving market expectations, and highlighting the investment value of domestic financial assets. On the other hand, with the recovery of the A-share market, core broad-based indices such as the CSI 300 and CSI 500 have shown significant gains, attracting a substantial inflow of funds. In the context of a rapidly rising market, broad-based ETFs, with their advantages of risk diversification and simple operation, could become a "powerful tool" for these investors to quickly invest in core broad-based indices.

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