Analysis of the Effectiveness of CSI 300 Index Passive Investment Strategies

Based on the background information you provided, I will conduct an in-depth analysis of the effectiveness of passive investment strategies tracking the CSI 300 Index.

The phenomenon you mentioned—“gradual weakening of value discovery function”—reflects the core challenge faced by passive investment strategies in the current market environment. According to search results, the size of passive funds has grown rapidly from 381 billion yuan in 2023 to over 1.3 trillion yuan, and this scale of indexation expansion has changed market dynamics.

• Systematic Rise in Market Capitalization Thresholds
  : Concentrated inflows of passive funds push up valuations of large-cap stocks, making it difficult for high-quality small and medium-cap companies to enter the index
• Homogenization of Constituent Stocks
  : Passive funds chase the same constituent stocks, leading to convergent price movements among stocks within the index
• Decline in Market Efficiency
  : A large amount of capital passively tracks the index instead of making active allocations based on value discovery

The phenomenon you mentioned—“stocks removed from the index perform better in the long run than those added”—is key evidence of the failure of passive investment strategies:

• Mean Reversion Effect
  : Stocks removed from the index usually have relatively low valuations and often experience value revaluation after removal
• Liquidity Shock
  : Concentrated selling by passive funds causes excessive price declines, creating investment opportunities
• Timing of Addition
  : Newly added stocks usually have performed well recently, leading to a “chasing high” feature

The rapid growth of passive fund size (from 381 billion yuan to over 1.3 trillion yuan) has brought complex impacts:

• Reduce investment costs
• Improve market liquidity
• Reduce operational risks of active management

• Decline in market pricing efficiency
• Valuation bubbles in index constituent stocks
• Impairment of value discovery mechanisms

Against the backdrop of weakened value discovery function, passive strategies that simply track the index struggle to generate excess returns:

• Homogeneous Competition
  : A large amount of capital adopts the same strategy, diluting excess return opportunities
• Decline in Market Efficiency
  : Passive capital dominates, making market pricing more passive
• Increase in Position Adjustment Costs
  : Transaction impact costs rise during constituent stock adjustments

Given the limitations of passive strategies, it is recommended to adopt:

• Core-Satellite Strategy
  : Passive investment as the core, active management as the satellite
• Factor Investment
  : Combine factors such as value, quality, and momentum to enhance returns
• Contrarian Allocation
  : Focus on stocks removed from the index but with sound fundamentals

Investors need to actively engage in value discovery:

• In-depth Fundamental Research
  : Go beyond index constituent stock limits to find undervalued targets
• Cross-Market Allocation
  : Not only focus on CSI 300 but also consider indices like CSI 500 and ChiNext
• Dynamic Position Adjustment
  : Adjust allocations based on valuation changes rather than index adjustments

Against the backdrop of declining passive investment effectiveness:

• Diversified Allocation
  : Avoid over-reliance on a single index or strategy
• Dynamic Risk Management
  : Adjust positions in a timely manner to control downside risks
• Liquidity Management
  : Pay attention to the liquidity of constituent stocks to avoid transaction shocks

Passive investment strategies that simply track the CSI 300 Index for position adjustments

in the current environment. The weakening of value discovery function, reversal of position adjustment effects, and deterioration of return structure all indicate that the traditional passive investment model faces severe challenges.

Investors need to re-examine passive investment strategies and combine diversified methods such as active management, factor investment, and value discovery to achieve ideal risk-adjusted returns in the current market environment. Passive investment remains an important investment tool, but it should not be regarded as a panacea for generating excess returns.

[1] Wall Street Journal - “沪深300指数创近五年低点” (https://cn.wsj.com/articles/沪深300指数创近五年低点-a154e68b)
[2] Yahoo Finance - “沪深300指數資料” (https://hk.finance.yahoo.com/quote/000300.SS/)
[3] Jinling API Data