If you're here to learn about the so-called "ETF index fund", let me correct a conceptual error before the article begins: ETF funds are only a type of index fund, and you need to have a stock account to buy them.
However, most people in real life equate ETFs with index funds, which is not a good understanding of the concept but does not affect the actual transaction.
If you are not very entangled in the concept and simply want to buy an index fund, you can just read the practical chapter behind Uncle Net.
If you still want to systematically understand the index fund related knowledge, you can look at the previous knowledge chapter.
A knowledge chapter
1, what is the index fund?
Funds, as we all know, investors pay money to buy fund shares, and then the fund manager takes the investors' money to buy stocks.
How to judge the level of manipulation of this fund manager? Just see if he can outperform the broader market index.
In the United States, the index is the S&P 500. In China, the index is the CSI 300.
Can a fund manager beat the index?
In the U.S., the answer is hard.
John Borg, the godfather of index funds, has crunched the numbers.
From 1945-1975, the average annual return of the S&P 500 was 11.3%, compared with 9.7% for stock funds, with the former earning 1.6% more per year than the latter.
In 2015, he crunched the numbers again for the past 30 years. Surprisingly, the results were almost exactly the same as 40 years ago.
The average annual return for the S&P 500 was 11.2 percent, and the average annual return for stock funds was 9.6 percent, with the former still making 1.6 percent more per year than the latter.
Since it's hard for a fund manager to beat the index, why let the fund manager bother picking stocks and just copy the index?
Copying the index fund is the index fund. For example, the CSI 300 index, Guizhou Maotai, China Merchants Bank, Ping An's weight is 4.98%, 3.09%, 2.75%. Then take out 4.98%, 3.09%, 2.75% of the fund assets to buy these 3 stocks.
The rest of the stocks are just like a gourd, so you get a fund that completely replicates the CSI 300 index and can easily outperform half of the active stock-picking funds managed by fund managers in the market (active funds).
2, the index fund's five major advantages
2.1 simple and transparent
Active funds only in the semi-annual and annual report to disclose all the positions, quarterly report is only the disclosure of the top 10 positions.
Normally, a fund holds 30 or even more stocks, and it is difficult to grasp the fund manager's movements by relying only on the top 10 positions, so it is often the case that the average investor is confused about the fund he is buying.
The index fund does not have this drawback.
The index fund tracks the corresponding index. For example, the CSI 300 index fund tracks the CSI 300 index, what are the constituent stocks of the CSI 300 index? What are the weights? These are all public data, the average investor can also easily know the index fund to buy what varieties of investment, how much money invested.
It is the simplicity and transparency of the index fund that has made it possible to say that "index funds are the most suitable investment varieties for ordinary investors".
2.2 Low cost of ownership
Since they only need to replicate the index, fund managers don't have to bother with stock selection. The holding cost of an index fund is much lower than that of an active fund.
The annual management fee and custodian fee for index funds are 0.5% and 0.1% respectively. The annual management and custodian fees for active funds are 1.5 percent and 0.25 percent, respectively, saving 1.15 percent of the annual cost of ownership by holding index funds.
2.3 Low Transaction Costs
Low transaction costs are relative to stocks.
When selling stocks, you have to pay a stamp duty of 1 per cent of the transaction amount, which is not required for ETFs.
In addition, many brokers have now canceled the "ETF trading commission less than 5 yuan minimum charge 5 yuan" rule, while the stock is still in the implementation of this rule.
2.4 Longevity
The index constituents are not static. For example, the CSI 300 index adjusts its list of constituents every six months, moving out stocks that don't meet the criteria, while moving in quality stocks that do. It can be said that as long as the stock market does not shut down, the index can "live forever".
2.5 Avoid the risk of black swans
Buying individual stocks the biggest risk is the risk of black swans, such as "scallops swim away" roe deer island, this kind of stock who encountered who bad luck.
The index generally does not include such stocks, buy the index of the probability of encountering a black swan is low.
Taking a step back, an index of dozens of hundreds of stocks, even if one of the mine, the overall impact on the industry is limited.
3, ETF is a kind of index fund
After finishing the index fund, we can finally say why ETF is a kind of index fund.
The full English spelling of ETF is ExchangeTradedFund, which literally translates to "exchange-traded fund".
In the beginning, ETFs weren't exclusively index funds, but also active ETFs, which can be called ETFs as long as they're listed on an exchange.
But active ETFs didn't develop as much as hoped, and they're basically nowhere to be found on the market. People started using the term ETF to refer specifically to exchange-listed index funds, and the translation of ETF became "traded open-end index fund.
Note that ETFs are specifically exchange-listed index funds. There are also a number of off-exchange index funds, such as ETF feeder funds and index-enhanced funds, which are collectively referred to as over-the-counter (OTC) index funds.
The difference between ETFs and OTC index funds is mainly reflected in the redemption methods, trading methods, investment methods and investment objectives.
3.1 Redemption Methods
ETFs have to use a basket of stocks to subscribe and redeem. For example, if you want to buy CSI 300 ETF, you have to allocate 300 stocks according to the weight of CSI 300 index and give them to the fund company to exchange for fund shares.
Similarly, if you sell your fund shares, the fund company won't give you cash, but rather 300 stocks, which you'll have to sell before you can exchange them for cash.
Over-the-counter index funds, on the other hand, are a bit simpler, and you can subscribe and redeem them directly with cash.
3.2 Trading venues
ETFs are a pain in the ass to buy and redeem, but that's mainly for the OTC market.
Besides OTC, ETFs can also be purchased directly on the exchange through a stock account, with the same buying and selling rules as stocks, and at a lower cost than stocks.
Over-the-counter index fund trading is not so convenient, and can only be traded through fund companies, bank counters, third-party sales platforms and other over-the-counter markets for subscriptions and redemptions.
3.3 Investment Methods and Investment Objectives
The investment objective of ETFs is to replicate the index as much as possible, pursuing the minimization of tracking error and deviation. Therefore, the fund contract requires the fund manager to invest only in index constituents and the position cannot be lower than 95%.
Over-the-counter index funds do not have such stringent requirements.
Subject to the requirement that the maximum position of open-ended funds cannot exceed 95%, ETF-linked funds require that the position of index constituent stocks should not be less than 90%, which gives the fund manager the autonomy to choose a position of 5%.
In order to pursue excess returns, the enhanced index fund requires that the index constituent stock position of not less than 80%, while the stock position of not less than 90%, giving the fund manager greater autonomy of choice.
Second, the practical chapter
1, index fund purchase channels
The simplest is still to open a stock account, the field to buy ETFs.
ETF buying and selling process and the same as the stock. First, find the trading interface, and then enter the code or name of the ETF you want to buy (for example, "CSI 300 ETF" or "510300"), and then enter the trading price and the number of trades on the line.
The minimum purchase unit for an ETF is the same as for a stock, starting at 1 lot. 1 lot is 100 shares, and an ETF here means 100 shares. Take the screenshot of the ticker as an example, the minimum to buy is $471.9.
If you don't have a stock account, you don't have to worry about it, you can just buy it directly from a third-party platform.
Take Alipay for example.
Open Alipay and find the fund option in the wealth management interface or the search button in the upper right corner.
Tap in, a search box will appear and then enter the code of the fund you want to buy or the abbreviation of the fund on the line. Once you've found your target fund, you'll see the options to "invest" and "buy" at the bottom.
Fixed investment is to buy at regular intervals, if you only want to buy once, choose buy.
Click on "Buy" and the trading screen will appear, enter the amount you want to buy and you're done. Note that the minimum buy amount is $10.
2, how to choose index funds?
There are a very large number of index funds on the market. In terms of ETFs alone, there are already 358 of them, and if you count the over-the-counter ones, the number of index funds is already in the thousands. With so many ETF funds, which is the best one to choose?
There are just 2 criteria for Uncle Net - performance and size.
The performance is the degree of fit between the index fund and the index it tracks. To put it simply, if an index fund can't beat the underlying index, it can't lose.
Before deciding whether to buy an index fund, the net uncle will usually look at its historical trend. If it loses the underlying index, then I would never buy the index fund.
Taking the CSI 300 ETF as an example, the CSI 300 ETF has been slightly outperforming the CSI 300 index since it was listed in 2012 on the premise that the trend is basically the same as that of the CSI 300 index, which is a better situation.
Size is all about how big the fund is. Size means liquidity, and generally speaking, the bigger the size, the more liquid the fund.
Take the SOE ETF, for example. With a size of only 13 million yuan and a daily turnover of less than 1 million yuan, there are basically not many people trading.
Then its trend becomes up and down, and it's hard to sell it at market price. Uncle Net would never touch this kind of ETF.
According to these two rules, Uncle Net screened some of the mainstream index funds in the market and categorized them according to the different investment targets as follows:
2.1 Broad-based Index Funds
Broad-based index funds are the ones that track the broader indexes, such as the ones that track the SSE 50, CSI 300, CSI 500, and GEM indexes.
These broad indexes mean average market returns, and buying these index funds means getting average market returns.
(1) SSE 50
On-market: 510050.SH Huaxia SSE 50 ETF (size 54.431 billion)
Off-market: 110003.OF Efatar SSE 50 Index A (size 23.052 billion)
(2) CSI 300
On-market: 510300.SH Huatai Berry CSI 300 ETF (size 48.365 billion)
On-market: 159919.SZ Harvest CSI 300 ETF (size 22.795 billion)
On-market: 510330.SH Huaxia CSI 300 ETF (size 28.948 billion)
Off-market: 000051.OF Huaxia CSI 300 ETF Link A (size 11.198 billion)
Off-exchange: 100038.OF Wells Fargo CSI 300 Enhanced (6.376 billion)
(3) CSI 500
On-exchange: 510500.SH Nanfang CSI 500 ETF (size 39.177 billion)
Off-exchange: 000478.OF Jianxin CSI 500 Index Enhanced A (size 4.497 billion)
(4) GEM Index
On-market: 159915.SZ Efatar GEM ETF (size 14.924 billion)
Off-market: 110026.OF Efatar GEM ETF Connect A (size 4.976 billion)
(5) GEM 50
On-market: 159949.SZ Huaan GEM 50 ETF (size 12.181 billion)
Off-market: 160420.OF Huaan GEM 50 (size 1.057 billion)
2.2 Sector/thematic index funds
Over the past few years, the market's excess returns basically came from a few popular sectors, such as consumerism and tech-internet, and military, environmental protection, media, and so on. In addition to this, big financials such as military, environmental protection, media, banking and securities have also been in the wind at some point in time.
Future, the probability of market excess returns also come from these directions.
(1) Consumption
On-market: 159928.SZ ETF CSI Major Consumption ETF (size 8.489 billion)
Off-market: 000248.OF ETF CSI Major Consumption ETF LINKED (size 5.142 billion)
(2) Pharmaceuticals
On-market: 159929. ETF CSI Medicine & Health ETF (size 497 million)
Off-exchange: 159992.SZ Yinhua CSI Innovative Pharmaceutical Industry ETF (size 3.047 billion)
(3) Wine
On-exchange: 512690.SH Penghua CSI Wine ETF (size 4.565 billion)
Off-exchange: 160632.OF Penghua SH Penghua CSI Wine ETF (size 5.175 billion)
(4) Technology Internet
On-market: 515000.SH Huabao CSI Technology Leaders ETF (size 5.885 billion)
On-market: 510050.SH Huaxia CSI 5G Telecommunication Theme ETF (size 54.431 billion)
On-market: 512760. SH Guotai CES Semiconductor Chip ETF (11.298 billion)
On-market: 512480.SH Guolian CSI All-Indicators Semiconductor ETF (9.114 billion)
On-market: 515030.SH Huaxia CSI New Energy Vehicle ETF (7.155 billion)
On-market: 513050.SH EFONDA CSI Overseas Interconnected ETF (19.769 billion)
On-market: 164906.SZ CBI CSI Overseas China Internet (4.645 billion)
Off-market: 160626.OF Penghua CSI Information Technology (618 million)
(5) Military industry
On-market: 512660.SH Guotai CSI Military ETF (size 13.146 billion)
Off-exchange: 161024.OF Fortune CSI Military (size 7.494 billion)
(6) Environmental Protection
On-exchange: 512580.SH Guangfa CSI Environmental Protection Industry ETF (size 1.959 billion)
Off-exchange: 001064.OF Guangfa CSI Environmental Protection Industry Link A (1.410 billion)
(7) Media
On-market: 159805.SZ Penghua CSI Media ETF (205 million)
Off-market: 160629.OF Penghua CSI Media (828 million)
(8) Banks
On-market: 512800. SH Huabao CSI Bank ETF (size 8.265 billion)
Off-exchange: 001595.OF Tianhong CSI Bank C (size 6.121 billion)
Off-exchange: 160631.OF Penghua CSI Bank (size 1.499 billion)
(9) Securities
On-exchange: 512880.SH Guotai CSI All-Indices Securities ETF (size 32.49 billion)
On-exchange: 512000.SH Huabao CSI All-Indices Securities ETF (size 23.849 billion)
On-exchange: 159993.SZ Penghua CSI Leading Securities ETF (size 1.638 billion)
Off-exchange: 161720.OF China Merchants CSI Securities Company (size 3.221 billion)
2.3 Overseas Index Funds
Over the past 10 years or so, U.S. stocks have been on a long bull run, while new-economy companies such as Tencent are listed in Hong Kong. Domestic investors want to invest in Hong Kong and U.S. stocks, but suffer from the lack of suitable investment channels, in recent years the birth of investment in overseas index funds is a good choice.
(1) Hong Kong stocks
On-market: 159920.SZ Huaxia Hang Seng ETF (10.192 billion)
On-market: 510900.SH Efatar Hang Seng H-share ETF (7.485 billion)
Off-market: 000071.OF Huaxia Hang Seng ETF LINKED to RMB A (2.439 billion)
OTC: 110031.OF Efatar Hang Seng H-share ETF Linked A RMB (size 1.139 billion)
(2) U.S. Stocks
On-exchange: 513100.SH Guotai Nasdaq 100 ETF (size 1.793 billion)
On-exchange: 513500.SH Bosera S&P 500 ETF (size 3.425 billion)
Off-exchange: 270042.OF Guangfa Nasdaq 100 Index A RMB (QDII) (size 3.539 billion)
Off-exchange: 040046.OF Hua'an Nasdaq 100 RMB (size 1.972 billion)
2.4 Commodity Index Funds
Domestic commodity index funds Mainly still gold index funds.
Gold index fund is not invested in gold stocks, but to the gold listed on the gold T + D, its rise and fall is mainly affected by the rise and fall of the price of gold, you want to buy gold hedge can choose to lower cost of gold index funds.
On-field: 518880.SH Hua'an Yi Fu Gold ETF (size 10.853 billion)
On-field: 159934.SZ Efontaine Gold ETF (size 4.295 billion)
3, how to invest in index funds?
3.1 The risk of investing in index funds
Before saying how to invest in index funds, Uncle Net still wants to talk about the risk of investing in index funds.
First of all, the index fund, although less volatile than individual stocks can also plummet or even cut back.
The figure shows the charts of the CSI 300 index (blue line), CSI 300 ETF (yellow line) and BOE A (white line) since 2016.
Individual stocks are significantly more volatile than the index, while the volatility of the CSI 300 ETF is largely in line with the CSI 300 index.
But don't think that because the index fund is less volatile, it's limited in its declines. When it comes to extreme markets, the index fund will still fall.
For example, in 2015, the A-share market fell from 5,178 points, and the net value of the CSI 300 ETF dropped from 5.077 to 2.588, nearly decimating the market.
Another risk of index funds is the premium rate, which is specific to ETFs (over-the-counter index funds).
ETFs have 2 prices, the market traded price and the net value.
Premium ratio = (market traded price - NAV)/NAV.
The market traded price is the price we see on the stock software and the NAV is the real price of the fund. But because of a variety of factors, these two prices are not always the same, and when it comes to extreme market conditions, there can even be a difference of more than 20 percent.
For example, in September last year, the premium for the Nasdaq ETF was as high as 19.39 percent, which is equivalent to a loss of about 20 percent if you bought in at the time.
3.2 How do you invest in an index fund?
There are many ways to invest in index funds, such as fixed investment and trend trading.
Trend trading weakens the risk of stock selection, but the ability to grasp the sector rotation is still very high, more suitable for more experienced investors.
The best way to invest in an index fund for newcomers is to invest in it, which is easy to learn, and to invest in it for a long period of time without losing money.
Since September 6, 2016, monthly fixed investment CSI 300 ETF, for example.
A *** fixed investment of 61 periods, invested funds 60000 yuan, the end of the period assets have become 79,075.22 yuan, fixed investment return of 31.79%.
Even from the highest point of the stock market to start fixed investment, all the way to stick down is also profitable. So, here is also the main introduction to the index fund fixed investment method.
(1) Buy
There are 2 ways to buy an index fund - regular fixing, and the more you fall, the more you buy.
Regular Fixed Amount is to put in a fixed amount of money at the same intervals. It's easy to learn and perfect for the beginning investor, and the example we just gave is the regular quota buying method.
But there is an obvious drawback to regular fixing, which is that you can't lower the average cost of ownership by adding to your position when the index is falling.
Experienced investors will choose the more down the more buy, in the process of the index decline, increase the amount of buying, the harder the fall, the more you buy. In this way, effectively pull down the average cost of ownership, with a view to obtaining higher returns in the future rise.
The difficulty in buying the more you fall is how to balance the rhythm of buying.
For example, you judge that there will be 10 buying opportunities during the decline, and then allocate funds accordingly, but after 10 buying, the index fell further, then this time can only be silly. This method is not suitable for investors who are just starting out.
(2) sell
The stock market is a wave of rising, will only buy will not sell, can only follow the index back and forth to do the roller coaster, so will sell is the master.
There are many ways to sell a fixed investment fund, and here are a few brief introductions.
The first is the expected return method.
Before the fixed investment, set the expected rate of return of this fixed investment, such as 10% or 20%, once the fixed investment return to reach the expected return to sell decisively.
Complicated, you can set the annualized expected rate of return. That is, fixed investment 1 year to achieve 10% return, when you fixed investment to the 3rd year, require 30% return before selling. When you invest in the 4th year, you require a 40% return before selling, and so on.
The second is to observe market sentiment.
The stock market has a characteristic that when the bull market, people around are talking about the stock market, and when the bear market, people around are shy to talk about the stock market.
You can silently fix your investment and then choose to leave when everyone around you is talking about the stock market, or the internet is full of reports about the bull market.
The third is the grid trading method.
This is a bit more complicated, and involves setting an expected return on each fixed investment. For example, set the return on each buy to be 10%, then sell at $11 for a $10 position fix and at $8.80 for an $8 position fix.
Of course, it is also possible to set a higher expected rate of return for lower-priced fixed amounts, for example, if the $8 position fixed requires a 15% rate of return, then sell at $9.20.
These are only some of the tips in fixed investment, help to improve the fixed investment returns. But the essence of fixed investment is to adhere to the regular investment, once the midway to give up, will certainly be lost, do not learn a little skill to put the cart before the horse.