As we look back at the year 2024, a remarkable transformation has unfolded within China's capital markets, particularly marked by the significant strides made in index-based investingBy examining public fund data, it is evident that exchange-traded funds (ETFs) have become the only category of stock funds to experience net inflows throughout the yearBy October of 2024, the size of these ETF investments surged past an impressive 3 trillion yuanThis notable rise in interest isn't confined to individual investors alone; a plethora of institutional participants has also emerged, including investment arms of the Central Huijin Investment Ltd., commonly referred to as the "national team." Such a trend indicates a growing acceptance of index investing across diverse market players, making it a pivotal strategy for investors entering the stock market, resulting in an increasingly rich atmosphere for index investing in the financial landscape.

The rapid escalation of index investing in 2024 wasn't a mere happenstance

It can be attributed to the heightened volatility seen in the securities markets in recent years, where actively managing investments has become progressively difficultIn contrast, index-based investing, which involves a diversified portfolio of specific stocks, allows for a more effective risk distributionConsequently, when the market stabilizes, such investment strategies offer the potential for positive returnsThe performance of various dividend-focused ETFs has been particularly outstanding in 2024, consistently delivering excess returns of over 10% relative to major indexesAdditionally, broader-based ETFs like the CSI 300 and the CSI 500 also showcased commendable performanceNotably, the introduction of the CSI A500 ETF in the latter half of the year, which serves as an upgraded ETF variant, garnered widespread investor enthusiasm as it adeptly tracked market trends, thus becoming one of the most popular products in recent issuances

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The unique advantages of index investing, alongside its growing recognition in the marketplace, have fueled this rapid expansion in 2024.

Delving deeper, it becomes apparent that the rise of index investing is a byproduct of the maturity achieved within China's capital marketsCurrently, domestic asset securitization has surpassed 60%, with the number of broad-spectrum investors exceeding 200 millionThe securities market has reached a noteworthy level of saturation, showcasing characteristics of universal participation in investmentHowever, the securities arena remains inherently complex, and the general populace may not always possess the necessary skills or conditions to engage directly in securities tradingThis is particularly true at a time when investment options have proliferated, with numerous derivatives and increasingly specialized financial instrumentsThere is a pressing demand for investment products that cater to the needs of the average investor—those that ensure smoother operations while concurrently achieving appropriate risk-adjusted returns

The emergence of public funds was primarily aimed at addressing this very issue.

However, practical experiences over time have demonstrated that actively managed public fund products are currently insufficient in fully meeting investor expectationsThis has paved the way for the popularity of passive index investingAs the rate of securitization climbs and the investor base expands, index investing has rapidly evolved, ushering in a new era of development.

Objectively speaking, the ascendance of index investing is an inevitable outcome of market evolution and it significantly influences how the market functionsFor instance, index investing typically does not factor in market timing during operations, which stabilizes the market to a considerable extent and helps mitigate excessive volatilityResearch supports the notion that once index-based investments, particularly broad-based ETFs, reach a certain scale, the overall stability of the market is notably enhanced

The focus of index investment on well-performing blue-chip stocks facilitates the promotion of a value-investing ethos, thereby guiding investment strategies toward a longer horizon and contributing meaningfully to the maturation of the market.

Additionally, the passive nature of index investing allows these products to primarily track relevant indices and mimic investment portfoliosOnce designed, the management complexity and cost of these funds remain relatively low, enabling investors purchasing ETFs to engage with minimal monetary barriersThis characteristic is particularly advantageous in attracting retail investors to the marketETFs have now emerged as a pivotal component within personal pension plans, solidifying their status as a priority investment choiceIn this context, ETFs not only serve as a substantial mechanism for drawing new capital but also provide investors with convenient, cost-effective avenues for investing, facilitating wealth accumulation.

As we move into 2025, the momentum behind index investing is expected to endure, revealing considerable room for growth in line with the trajectories of more mature markets