"Kim Ki Yan" Xia Lu / Author
On April 12, 2024, the State Council issued the new "National Nine Articles", pointing out that in terms of vigorously promoting medium and long-term funds into the market and continuing to expand long-term investment strength, it is necessary to vigorously develop equity public funds and greatly increase the proportion of equity funds. Establish a fast-track approval channel for exchange-traded funds (ETFs) to promote the development of indexed investment.
Driven by policies, index funds continue to expand, and index enhancement funds, which combine active management and passive management, have also attracted more and more attention from investors in recent years. At this point, some investors may ask, what has the index enhancement fund "increased"? Where is the "strong"?
1. The two types refer to the enhanced number of funds that are different and related, and increase active operations in order to achieve higher excess returns
Compared with ordinary index funds, index enhancement funds can carry out certain active operations on the basis of tracking the underlying index, so as to try to obtain performance returns that are higher than the index benchmark.
In other words, index enhancement funds are still a type of index fund, and compared with ordinary index funds, index enhancement funds "increase" actively managed or enhanced strategies.
According to the underlying index, index enhancement funds can be divided into index enhancement funds that track broad-based indices and index enhancement funds that track industry indexes, and these two types of funds are somewhat different in terms of underlying indices and strategies.
On the one hand, in terms of tracking the underlying index, the index enhancement fund that tracks the broad-based index tracks the broad-based index such as CSI 300, CSI 1000, and SSE 50, and does not invest in stocks in a certain industry. Index Enhanced Funds that track industry indices track indices of specific industries or sectors, and their constituent stocks are also made up of stocks in specific industries, such as pharmaceuticals, technology, consumption, etc.
Therefore, index enhancement funds that track broad-based indices are diversified to different industries and sectors, and the industry risks they face are more diversified. Index enhanced funds that track industry indices because their holdings are concentrated in a particular industry, and when that sector or sector performs well, the fund may outperform a broad-based index fund or even its underlying index; Conversely, these funds may be exposed to greater risk than the market average.
On the other hand, in terms of strategy, the purpose of the index enhancement fund tracking the broad-based index is to obtain returns beyond the index through certain strategy optimization while replicating the broad-based index; In addition to tracking and replicating the performance of specific industry or sector indexes, index enhancement funds that track industry indices may also need to delve into the industries in which they mainly invest and explore investment opportunities in the industry in order to achieve higher excess returns.
In other words, for fund managers, in terms of investment and research capabilities, stock selection capabilities and timing, index enhancement funds that track industry indices put forward higher requirements; For investors, investing in an index enhancement fund that tracks an industry index may have higher expected returns and risks than investing in an index enhancement fund that tracks a broad-based index.
According to the available data of Oriental Wealth Choice as of June 19, 2024, according to the classification standard of Dongcai tertiary funds, there are about 279 index enhancement funds currently in operation in the market, including 276 enhanced index funds, 2 QDII enhanced index funds, and 1 enhanced index bond fund.
Since the beginning of 2024, as of June 19, a total of about 14 index enhancement funds have been issued in the market, among which, on May 27, 2024, E Fund Management Co., Ltd. (hereinafter referred to as "E Fund") established E Fund SSE 50 Enhanced Strategy ETF, whose performance comparison benchmark is the return rate of the SSE 50 Index, and its investment objective is to control the daily average tracking difference and annualized tracking error between the growth rate of the fund's net value and the performance comparison benchmark. Pursue a return on investment that exceeds the benchmark of performance.
In terms of investment strategy, E Fund SSE 50 Enhanced Strategy ETF is an enhanced strategy exchange-traded open-ended index securities investment fund. With the SSE 50 Index as the underlying index, through in-depth fundamental research, we select companies with core competitive advantages, construct and optimize investment portfolios, and pursue investment returns that exceed the performance benchmark on the basis of striving to control the absolute value of the daily average tracking difference between the growth rate of the fund's net value and the performance benchmark of no more than 0.35% and the annualized tracking error of no more than 6.5%.
2. Index income + active enhancement income, where is the "strong" index enhancement fund?
Since index enhancement funds are "increasing" active management or enhancement strategies, where are they "strong"? How "strong" is it?
Let's start with a set of data.
The data shows that since 2010, as of November 9, 2023, more than 50% of index enhancement funds have achieved positive excess returns every year compared with the performance benchmarks of various funds, and in most years, the average excess returns of index enhancement funds are greater than 0.
Among them, from 2015 to 2023 (as of November 6, 2023), the average excess return of the all-market index enhanced fund was 4.55%, 4.42%, 3.78%, 1.69%, 7.46%, 14.03%, 4.59%, 1.72%, and 0.65% respectively; The proportion of products with positive excess returns in the whole market index enhancement fund was 76.47%, 86.05%, 66.67%, 80.6%, 86.9%, 96.04%, 84.03%, 69.18% and 60.68% respectively.
Judging from the excess return of index funds from 2015 to 2023, although the index enhancement fund is still a class of index funds, under the active strategy and active management that ordinary index funds do not have, the index enhancement fund can not only roughly replicate the trend of the underlying index, but also obtain excess returns.
3. How to choose the right index enhancement fund for you?
Due to the increase in factors such as active management and active strategies of fund managers, there may be more steps in the process of selecting index enhanced funds than ordinary index funds. For example, investors can analyze the following three aspects based on their own investment goals and capabilities to select the right index enhancement fund for themselves.
1. Exponents
As mentioned above, index enhancement funds include index enhancement funds that track broad-based indices and index enhancement funds that track industry indexes, so investors who pursue stable returns and do not pay too much attention to market volatility and popular industries can choose those index enhancement funds with broad-based indices such as CSI 300 Index and CSI 500 Index as the underlying index; And if investors have in-depth knowledge and confidence in a particular industry or sector, they can focus on index enhancement funds that track indices in a particular industry.
2. Fund companies and fund managers
Since the business focus of each fund company is different, some fund companies are good at managing equity funds, while others are good at managing fixed income funds. For fund companies that are good at managing index funds, they may have managed more index funds than other fund companies in history, and their fund managers may have more experience in managing index funds than fund managers of other companies.
In short, before choosing to invest in a specific index enhancement fund, investors can pay attention to the history of the fund company's management of index funds, as well as whether the fund managers have managed index funds, and the historical performance of index funds under the names of these fund managers.
3. Tracking error
Like regular index funds, index-enhanced funds also have a "tracking error" indicator. And because of the addition of an active management factor, the tracking error of an index enhanced fund may be higher than that of other index funds that track the same underlying index.
At this time, investors can look at the fund's prospectus or fund contract and other documents to check the absolute value limit of the daily average tracking difference between the growth rate of the fund's net value and the performance benchmark, the annualized tracking error limit, etc., to compare whether the actual tracking error of the fund deviates from its original set range.
All in all, compared to ordinary index funds, index enhancement funds have the opportunity to obtain returns that exceed the benchmark index while retaining the advantages of index funds. Before investing in an index enhancement fund, investors should also choose a fund with room for growth that matches their risk tolerance and holding period according to their risk tolerance, investment horizon, and target return level, just like investing in other types of funds.