Market Cap vs. Dividend Strategy Indexes: Rebalancing Mechanisms & Long-Term Return Impact

Based on the collected data, I will conduct an in-depth analysis of how the differences in rebalancing mechanisms between market cap indexes and dividend strategy indexes affect long-term investment returns.

Market cap indexes (such as CSI 300, CSI 500) use market cap as the core selection criterion, and their rebalancing mechanism naturally exhibits the “chasing up and selling down” feature [1]:

: Based on the comprehensive ranking of total market cap and trading volume, priority is given to companies with large scale and good liquidity. When stock prices rise, the company’s market cap increases, making it easier to be included in the index; conversely, companies whose market cap shrinks due to falling stock prices may be excluded.

: During annual rebalancing, it often includes popular stocks that have risen significantly in the year and excludes underperforming stocks, forming a superficial “chasing up and selling down” phenomenon.

Dividend strategy indexes take dividend yield as the core indicator, showing completely different rebalancing characteristics [1]:

: Dividend yield is used as the main screening and ranking criterion. When stock prices rise, leading to a decrease in dividend yield, the weight of the company will be reduced; companies with stable dividends but falling stock prices gain relative advantages.

: Exclude companies with high prices and low yields due to rising stock prices, and include companies with low prices and high yields, forming the effect of “buy low and sell high”.

:

• Mainly rely on stock price increases to obtain capital gains
• Dividend income is relatively low (e.g., CSI 300’s current dividend yield is about 3.41%) [3]
• Income is highly correlated with the overall market trend

:

• Have dual income sources: stock price fluctuations + stable dividends [4]
• Current dividend yields are generally between 4% and 6%, significantly higher than the risk-free rate [4]
• Dividend reinvestment brings significant compound interest effects

Data shows that the CSI A500 Total Return Index (including dividend reinvestment) achieved a return of 558.34% from its base date in 2004 to June 30, 2025, while the price index during the same period was only 363.05%, a gap of 195.29 percentage points, all from the compound interest effect of dividend reinvestment [4].

:

• Relatively high volatility
• Larger drawdowns during market downturns
• Relatively moderate long-term annualized returns (CSI 300 has an annualized return of about 10.03% since its base date) [3]

:

• Lower volatility and anti-drop properties
• More stable performance in weak markets (e.g., the Stock Connect Dividend Low Volatility Price Index was negative in 2023, but the total return index achieved positive returns supported by dividends) [4]
• Some dividend indexes show stronger long-term return capabilities (S&P China A-Share Dividend Opportunities Total Return Index has an annualized return of 15% since 2009) [4]

:

• Market cap indexes often perform better, fully sharing the market’s rising dividends
• Dividend strategies are relatively conservative and may miss some growth opportunities of growth stocks

:

• Dividend strategies perform better, with stable dividends providing a safety cushion
• Market cap indexes have larger drawdowns and take longer to recover

Market cap indexes assume the

, using the simplest and most stable rules to obtain average market returns, serving as the base of the investment portfolio [1]. Dividend strategy indexes, on the other hand, tilt towards specific risk-return characteristics on this basis, and can be used for defense, smoothing volatility, cash flow supplementation, or style supplementation [1].

The two indexes are not opposites but solve problems at different levels [1]:

• Core + Satellite Strategy
  : Use market cap indexes as the core to obtain benchmark market returns, and dividend strategies as satellites to provide stable income sources
• Offensive-Defensive Balance
  : Market cap indexes provide growth elasticity, while dividend strategies provide defensive stability
• Cash Flow Management
  : Stable dividends from dividend strategies can meet regular cash needs

• Conservative Investors
  : Can increase the allocation ratio of dividend strategies
• Balanced Investors
  : It is recommended to allocate the two types of indexes evenly
• Aggressive Investors
  : Can focus on market cap indexes to obtain higher elasticity

Currently, the valuation quantile of dividend low-volatility indexes is relatively high, but the absolute valuation still has advantages (P/E ratios are generally around 7x) [5]. Market cap indexes have a safety margin near 3900 points [3].

Both types of indexes need to be held for the long term to reflect their mechanism advantages. Short-term rebalancing may deviate from the established strategy and affect long-term returns.

The difference in rebalancing mechanisms between market cap indexes and dividend strategy indexes essentially reflects two different investment philosophies: the former pursues market representativeness, while the latter focuses on value capture. From the perspective of long-term investment returns, dividend strategies can provide relatively stable returns in different market environments through stable dividend income and “buy low and sell high” rebalancing mechanisms, especially the significant compound interest effect of dividend reinvestment. Market cap indexes, on the other hand, have greater upward elasticity in bull markets.

Each type of index has its own strengths. Wise investors should reasonably allocate the two types of indexes based on their own risk tolerance, investment period, and market environment to build a diversified investment portfolio that can both share market growth dividends and obtain stable cash returns.

[1] NetEase - “How to View: CSI 300’s Chasing Up and Selling Down? (12.15)”
[2] Snowball Special Issue 364 - “2024 Investment Summary”
[3] East Money - “Layout CSI 300, CSI 500 Index Funds Near 3900 Points: The Best for Medium- and Long-Term Investment”
[4] Securities Times Online - “Representative ‘Dividend Fund Investment’ in the Whole Market, A Quick Overview with One Chart!”
[5] 21st Century Business Herald - “Is Dividend ETF Still Worth Buying? Let’s Take a Look at Several Representative Dividend ETFs”