On November 15, the first batch of 10 A500 ETFs completed its first month of trading, amassing a total scale that surpassed 1150 billion yuan, setting a record for the fastest growth to exceed the 100 billion mark in historyThis growing excitement is further amplified by the launch of a second batch of products, along with the establishment of off-market linked funds, which brings the total asset management value of ETFs close to 2000 billion yuanThe Huaxia Fund's A500 ETF (512050), which debuted on the 15th, alone saw a staggering share volume exceeding 4.8 billion, reflecting a vibrant trading atmosphere and high turnover rates relative to other ETFs.

This fervor for ETFs stands in stark contrast to the decline in assets for actively managed funds, marking a significant shift in investment preferences among Chinese investorsThe A-share market is currently experiencing a wave of index-based investment, signaling a proactive transition in investor strategies.

Since the beginning of 2024, the "national team," led by the Central Huijin Investment, has actively entered the market via ETFs, significantly increasing its positions in broad-based indices like the CSI 300 ETFBy the end of the third quarter, the national team held equity ETFs valued at over 940 billion yuan, representing more than 800% of its holdings at the end of 2023. Such moves have created a demonstrative effect, prompting retail investors and various institutional types to increasingly trade through ETFs.

According to statistics from Wind, as of the third quarter, the scale of passive equity funds in the A-share market reached 3.36 trillion yuan, accounting for 47% of the market, comparable to levels seen in the United States in 2018. Among these, passive public funds held shares worth up to 3.16 trillion yuan, representing 8.4% of the total freely floating market capitalization of A-shares, surpassing the active public funds’ 2.89 trillion yuan during the same period

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This substantial growth signifies a historic transition where ETF assets have surged by 600 times over the past two decades.

Of this over 3 trillion yuan in passive equity funds, broad-based ETFs dominated with a weight of around 74%. Sector-specific ETFs covering technology, media, telecommunications (TMT), consumer healthcare, and financial real estate also contributed significantly, each exceeding 5% in total market representationNotably, products investing in the CSI 300 surpassed 1 trillion yuan, accounting for roughly 50%. The A500, despite its short time in existence, has so far exceeded 1150 billion yuan in scale and is expected to rank among the top two in the near future.

What accounts for the increasing popularity of ETFs among investors? First and foremost, in recent years, actively managed public funds have faced considerable scrutiny from investors due to unsatisfactory performance, leading to a situation where they frequently underperform comparable passive fundsAccording to Morningstar statistics published in October 2024, only 20% of active funds outperformed similar passive funds over the past yearWhen looking at a longer timeframe, over 50% of active funds have underperformed passive funds in the last three years, with some funds shutting down before completing three years of operation.

To compound this, even as the performance of active funds falters, their fee structures often remain significantly higher than those of passive fundsAs of mid-2024, the average holding cost of actively managed funds (including management fees, custody fees, trading costs, etc.) stood at 2.55%, while the annual holding cost of passive funds was around 1%. If active funds offered superior returns compared to passive options, charging higher fees could be justifiedHowever, with their long-term returns lagging behind those of passive investments while still demanding high fees, investors are left with little choice but to "vote with their feet."

Moreover, the variety inherent in passive funds expands options across equities, bonds, commodities, and currencies

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Investors can also choose cross-border ETFs that allow for indirect investments in US stocks, Japanese equities, and European markets, shielding them from the risks of individual stock selections and avoiding issues such as style drift found with active fundsMany ordinary investors are increasingly drawn to the strategy of pursuing moderate returns by utilizing a basket of index-linked component stocks, moving away from the high-risk, high-reward strategies that previously dominated the marketThis trend is reflected in mature Western markets, and now, increasingly so in the A-share market.

The recent introduction of the A500 ETF sparked interesting discussions regarding its performance against the widely recognized CSI 300. Investors are eager to know which ETF may offer better returnsIn its construction methodology, the CSI 300 index largely bases its constituent stock selection on market capitalization, averaging around 189.9 billion yuan per company.

In contrast, the A500 index adopts an upgraded method that combines both “scale” and “sector balance.” Additionally, it excludes stocks with ESG ratings below a level C and mandates that stocks are included in the Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect programs.

Looking at market capitalizations, the A500 index takes a more downward approach, consisting of 165 stocks valued above 5 billion yuan, compared to 206 in the CSI 300. Furthermore, the A500 includes 26 stocks valued between 500 million and 1 billion yuan, along with two that are below this thresholdOverall, the average market capitalization for A500 constituents is lower, at approximately 109.9 billion yuan, in contrast to the CSI 300.

The industry allocation between the two indices is considerably differentThe top three sectors in the CSI 300 are banking, non-bank financials, and food and beverage, with respective weights of 12.02%, 11.36%, and 9.79%, totaling 33.17%. In comparison, the top three sectors comprising the A500 are electronics, power equipment, and food and beverage, with shares at 10.19%, 8.79%, and 8.23%, summing up to 27.21%, with combined banking and non-bank financials at only 14.4%. This difference highlights that A500 offers a more balanced sector allocation, reducing excessive exposure to large-cap weightings found in banks.

When it comes to profitability, the CSI 300 outperforms, boasting sales margins of 19.12%, net margins of 12.3%, and return on equity (ROE) of 8.07%, slightly surpassing A500's figures of 18.29%, 10.05%, and 8.05%. From a valuation standpoint, the A500 has a slightly higher long-term valuation compared to the CSI 300. As of November 18, the latest price-to-earnings (PE) ratio for A500 stood at 14.3 times, just shy of the median valuation since its inception in 2004, at 14.85 times, but higher than the current valuations of the CSI 300. The main reasoning behind this is that the CSI 300 holds a larger proportion of banking-related companies that tend to suppress overall valuation performances.

In terms of long-term performance, from the benchmark date of December 31, 2004, to November 18, 2024, the A500 index presents a cumulative return rate of 365%, which is greater than the CSI 300's 276.5%, with annualized returns of 8.28% versus 7.08%. Overall, while both indices have strengths and weaknesses concerning their construction methods, sector allocations, profitability, and valuation levels, the A500 demonstrates superior long-term returns, which could make it a more favorable choice for long-term investors.

Particularly noteworthy is the Huaxia Fund’s A500 ETF (512050), which has garnered significant attention from investors

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It sold out on its first day of issuance and has become one of the leading products in terms of scaleThe fund's management and custody fees, at just 0.15% and 0.05% respectively, are among the lowest in related markets.

Looking further, while broad-based ETFs exhibit moderate long-term returns, exceptional-sector thematic ETFs have the ability to outpace this performance, making them a favored option for several investorsHistorically, since December 31, 2004, 21 out of the 31 industrial sectors tracked by the Shenwan have outperformed the A500 index; the food and beverage sector excels, boasting an impressive growth exceeding 100-fold, while household appliances have grown 30.3 times, and sectors such as pharmaceuticals, computers, power equipment, national defense, and construction materials have each surpassed 10-fold growth.

Among those winning sectors, some maintain a robust long-term growth narrative, presenting possible opportunities to continue leading market performanceConversely, others, such as biotech, may face substantial repricing based on changing policies or economic dynamics, potentially diminishing their future performance.

On a global scale, sectors such as consumer goods and information technology are poised to continue generating excess returns in the long runAccording to Wind's data, from December 31, 2004, to date, the top five sectors in the U.S. market based on return rates have been information technology, consumer discretionary, communication services, healthcare, and industrials, with cumulative appreciation rates of 198 times, 57 times, 33 times, 14.9 times, and 12.4 times, respectively.

In European markets, the German stock market notably ranks consumer discretionary, information technology, financials, industrials, and consumer staples as the top performers during this period, with cumulative increases of 16 times, 11.3 times, 7.4 times, 5.7 times, and 4.7 times respectively

Similarly, Japan’s leading sectors remain technology, industrials, healthcare, consumer discretionary, and telecommunications, with appreciation multiples of 9, 8, 7.3, 6.6, and 6 times respectively.

Such observations indicate a consistent theme: on a global level, sectors like consumer goods and information technology reliably outperform other industries or mainstream market indices over a long-term horizonBut what drives this prevailing trend?

Beginning with consumer goods, they reflect a perpetual human need; consumption companies typically require minimal ongoing investments and incur little debt interest, thus generating substantial free cash flow with straightforward business modelsThis has allowed the emergence of market leaders such as Kweichow Moutai in China, Coca-Cola in the USA, LVMH Group in Europe, and the major trading houses in Japan, each a stellar example within the consumer sector.

The technology sector, encompassing crucial fields like semiconductors and artificial intelligence, represents the core driving force behind the global macroeconomyThis sector's long-term growth potential exceeds that of many industries, resulting in higher valuations overall and theoretically sharper excess returnsParticularly in the U.S. market, with its powerhouse companies like Apple, Microsoft, TSMC, Broadcom, and NVIDIA, the past 20 years have yielded a staggering accumulated growth of 198 times, far eclipsing that of A-share top-tier segments such as liquor, which saw growth of only 148 times.

Markets are often viewed as weighing machines over timeThe sustained outperformance of information technology and consumer sectors on the global stock scene proves their long-term growth reliability, and hence it is highly likely they will continue to lead market performance in the futureFollowing this perspective, ETFs related to these sectors could be worth monitoring, with promising long-term outcomes.

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