News 2024-06-23 170 Comments

Unlocking the "New" Formula of CSI 500 Index

The tide of technology surges, consumption quality upgrades, and industrial transformations surge... China is forging ahead on the path of high-quality development. Investing is a long-distance race, keeping pace with the index, and grasping the era's "beta". The "Index Quick Look" column deeply analyzes the characteristics of different indexes, helping investors explore new investment opportunities.

Which index has been hot in the market recently? The CSI A500 cannot be overlooked.

As a member of the CSI "A series" of characteristic broad-based indexes, the CSI A500 Index was just released on September 23. In just one month, the scale of exchange-traded products tracking this index has grown rapidly, and a batch of exchange-traded index funds has also arrived.

Today, products such as the E Fund CSI A500 Index Fund (Class A: 022459/Class C: 022460) that track the CSI A500 Index are officially launched, providing new tools for investors to layout representative companies in the A-share market.

In this article, let's look at the characteristics of this index and what kind of "opening methods" it has.

"Complete" and "New" Formula

The CSI A500 Index selects 500 stocks with larger market value and good liquidity from various industries as the index samples, reflecting the overall performance of the stocks of the most representative listed companies in each industry. Specifically, we can summarize its characteristics with "complete" and "new".

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"Complete" refers to a balanced industry distribution and a wide coverage of market value.

The compilation method of the CSI A500 Index focuses on industry balance. On the one hand, it will prioritize the leading companies in the CSI third-level industries; on the other hand, when selecting samples, it will try to make the industry distribution of the index components as close as possible to the overall market situation, reducing the impact of scale factors on the industry distribution of the index, to fully depict the industry structure characteristics of the A-share market.Currently, the index covers all the first-level and second-level industries of the China Securities Index, as well as 91 out of 93 third-level industries, achieving a high level of sub-industry coverage, almost achieving full coverage of A-share industries.

Under such a sampling method, the China Securities A500 Index covers large, medium, and small market value stocks in the A-share market. Wind data shows that as of October 14, there are 100 constituent stocks in the China Securities A500 Index with a total market value exceeding 100 billion yuan, 96 constituent stocks with a total market value between 50-100 billion yuan, 201 constituent stocks with a total market value between 20-50 billion yuan, and 103 constituent stocks with a total market value below 20 billion yuan.

The term "new" is mainly reflected in two aspects.

Since the sampling prioritizes the selection of leaders in the China Securities third-level industries, the China Securities A500 Index covers more emerging fields, such as optical modules, power grid equipment, energy storage, and other sub-industries in the field of technology manufacturing, which can timely include some leading companies in emerging fields, better represent new quality productive forces, and seize the development opportunities of emerging industries.

In addition, as a characteristic of a relatively "new" compilation plan, the China Securities A500 Index also includes ESG and interconnectivity screening criteria in the sampling process, eliminating listed companies with China Securities ESG evaluation results at C and below, and requiring constituent stocks to be within the scope of Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect securities, providing convenience for domestic and foreign medium and long-term funds to allocate A-share assets.

Strong representativeness

Market representativeness is an important dimension to understand a broad-based index.

Specifically, the number of constituent stocks in the China Securities A500 Index only accounts for 10% of the China Securities Comprehensive Index, but the proportion of total market value and free-flowing market value both exceed 50%, with operating income and net profit attributable to the parent company accounting for 63% and 69%, respectively, showing strong representativeness in the A-share market. Moreover, the technological content of the constituent stocks is also sufficient, with R&D expenditure accounting for 55% of the China Securities Comprehensive Index.

From the perspective of fundamental performance, data shows that the operating income of the constituent stocks of the China Securities A500 Index grew by an average of 11% annually from 2021 to 2023, and the net profit attributable to the parent company grew by an average of 9% annually, with a return on equity (ROE) consistently above 10% over the years, showing relatively stable profitability.

The China Securities A500 Index, with its strong market representativeness, balanced industry distribution, and relatively stable fundamental performance, can help investors deploy A-share assets with one click, and grasp the pulse of the times over a longer period.From the perspective of long-term risk-return characteristics, data indicates that from the base date of December 31, 2004, to October 14, 2024, over a period of nearly 20 years, the CSI A500 Index has an annualized return of 8.3%, an annualized volatility of 25.5%, and a Sharpe ratio of 0.41.

Asset Allocation "Good Partner"

For investors with relatively low risk appetite, they can consider constructing a stock-bond allocation portfolio using the CSI A500 Index.

Representing equity assets with the CSI A500 Index and bond assets with the ChinaBond New Comprehensive Index, we can examine the performance of a stock-bond "sixty-forty" allocation portfolio.

Historical backtesting data over nearly 20 years shows that a "sixty-forty" portfolio, with 60% allocated to the stock index and 40% to the bond index, has an annualized return of 6% and an annualized volatility of 15%. Although the return is somewhat lower compared to investing solely in the CSI A500 Index, the reduction in volatility is more significant, the return curve is more stable, and the risk-return ratio is notably improved.

Investors can adjust the proportion of the CSI A500 Index in their investment portfolio based on their investment objectives, risk tolerance, and capital term, to create a suitable allocation plan.

The General Manager of the Index Research Department at E Fund and the Fund Manager of the E Fund CSI A500 Index Fund stated, looking ahead, as overseas markets enter a period of easing, domestic monetary, real estate, and capital market policies are beginning to target specific efforts. Subsequent policies aimed at stabilizing economic growth and maintaining the stable development of the capital market are expected to be implemented, further improving market expectations. The CSI A500 Index has characteristics such as broad sample coverage, balanced industry distribution, and large investment capacity. The launch of related index funds will help to further enrich the A-share market's broad-based allocation tools and attract medium to long-term capital into the market.

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