03 · Funds and ETFs: The Ordinary Person's Asset Tool
For most people, buying stocks directly or trading futures is not the optimal answer — funds are the convenient tool for ordinary people to participate in the market: low threshold, diversified risk, time-saving.
This article maps the fund world: the public/private, active/passive, off-exchange/on-exchange distinctions; the arbitrage mechanism and premiums/discounts of ETFs; and the investing world's most famous debate — "why index investing beats most fund managers". It closes with an A-share broad-based index list and common ETF reference tickers.
1. What Is a Fund
A fund = a pooled investment vehicle that collects money from many people and invests it centrally through a professional manager.
| Concept | Description |
|---|---|
| Net asset value (NAV) | Price per fund unit = total fund assets ÷ fund units |
| Subscription/redemption | Buy/sell units with the fund company (off-exchange) |
| Management fee | Management compensation deducted from NAV annually (active funds ~1.2%-1.5%, index funds ~0.15%-0.5%, per latest rates) |
| Custody fee | Fee charged by the custodian bank (~0.1%) |
Return sources: NAV growth + dividends. Cost sources: management/custody fees (deducted annually) + subscription/redemption fees + possible sales service fees — fees are the long-term enemy of compounding, detailed later.
2. Two Core Classification Pairs
Public vs Private
| Dimension | Public funds | Private funds |
|---|---|---|
| Threshold | Low (from 10 yuan) | High (accredited investors, from 1 million yuan) |
| Disclosure | Strict, transparent | Loose |
| Regulation | Strong CSRC oversight | Filing-based |
| Suits | Everyone | High-net-worth individuals |
Active vs Passive
- Active funds: the manager picks stocks and times the market, aiming to beat the index. Success depends on human skill and style.
- Passive funds (index funds): mechanically replicate index constituents, aiming to match the index. Low cost, transparent, independent of any individual.
- Long-term data: most active funds fail to beat passive indexes (see section 5) — the industry's "pain point" of asset management.
Off-exchange subscription vs on-exchange trading
| Dimension | Off-exchange (fund company/platform) | On-exchange (exchange/securities account) |
|---|---|---|
| Counterparty | Subscribe/redeem directly with the fund company | Trade between investors (ETFs) |
| Price | At the day's closing NAV (unknown price) | Real-time price (like a stock) |
| Settlement | Redemption T+1 to T+3 | Funds usable same day after selling |
| Representatives | Ordinary open-end funds, index funds | ETFs, LOFs |
3. ETFs in Depth: Index Funds Traded on Exchange
An ETF (Exchange Traded Fund) = an index fund listed on a stock exchange, tradable anytime like a stock.
Primary market vs secondary market (the arbitrage mechanism)
| Market | Participants | Mechanism |
|---|---|---|
| Primary market (creation/redemption) | Institutions (authorized participants) | Exchange a basket of constituent stocks for ETF units (creation), or the reverse (redemption); high threshold (usually from hundreds of thousands of units) |
| Secondary market (trading) | All investors | Buy and sell at real-time prices like a stock, one lot is enough (e.g., 100 units) |
Premium/discount and arbitrage
- Discount: secondary price < NAV (true value)
- Premium: secondary price > NAV
Arbitrage principle: when price ≠ NAV, institutions (with enough capital) arbitrage
Premium → buy the basket of stocks → create ETF units → sell in the secondary market → pocket the gap (pushing price back to NAV)
Discount → buy ETF on exchange → redeem into the stock basket → sell the stocks → pocket the gap (lifting price back to NAV)Conclusion: arbitrage keeps ETF prices pinned close to NAV. But the QDII (cross-border) ETFs retail investors commonly trade can sit at persistent high premiums — cross-border creation/redemption is constrained by FX quota and long redemption cycles (see section 7), so arbitrage fails, and retail buyers paying a high premium are simply handing money to arbitrage institutions.
Teaching note: arbitrage details (creation/redemption thresholds, T+0/T+1, fees) follow the latest rules of each exchange and fund company.
4. Common ETF Types
| Type | Examples | Characteristics |
|---|---|---|
| Broad-based ETFs | CSI 300, CSI 500, etc. | Cover a wide class of stocks; balanced |
| Industry ETFs | Brokers, pharma, semiconductors | Bet on a single industry; volatile |
| Thematic ETFs | New energy, AI, dividends | Concept-driven; valuations overheat easily |
| Cross-border QDII ETFs | Nasdaq, S&P, Hang Seng Tech, Nikkei | Invest offshore; premium risk |
| Commodity ETFs | Gold ETF, soybean meal ETF | Track commodity prices; gold ETFs most popular |
| Bond ETFs | Treasury ETFs, corporate bond ETFs | Low volatility; rate-sensitive |
| Money market ETFs / on-exchange money funds | E.g., Yinhua Rili, Huabao Tianyi | Idle-cash management; near demand-deposit |
The ETF names above are type examples only — tickers and fee rates follow the latest data.
5. Index Funds vs Active Funds: The Compounding Magic of Fees
Fee comparison (historical common levels; per latest announcements)
| Item | Index fund (passive) | Active fund |
|---|---|---|
| Management fee | ~0.15% | ~1.2%-1.5% |
| Subscription fee | Often discounted | Often discounted |
| Total annual cost | ~0.2%-0.5% | ~1.5%-2%+ |
Long-term compounding gap: run the numbers
Assume an initial 100,000 yuan, 7% gross annualized return, held 30 years (compounding):
| Scenario | Annual cost | Value after 30 years | Gap |
|---|---|---|---|
| Low-cost index fund (cost 0.2%) | 0.2% | ~680,000 | — |
| High-cost active fund (cost 1.7%) | 1.7% | ~450,000 | About 230,000 less (a loss of roughly 1/3) |
⚠️ The compounding damage of fee rates
100,000 yuan, 7% gross annualized, held 30 years: the gap between a 0.2% and a 1.7% fee is 230,000 yuan (roughly a third of the asset lost). Management fees deduct only a little each year, but compounded over thirty years they can eat a third of the asset — the killing power of fees only shows up over the long run.
The above is a teaching-basis simplified calculation (net returns 6.8% vs 5.3%), ignoring taxes and subscription/redemption fees — it exists only to illustrate the compounding damage of fee rates.
The classic argument: "S&P 500 ~10% annualized vs most active funds underperforming"
- The S&P 500 has returned roughly 10% annualized over the long run (multi-decade horizons) including reinvested dividends, per the latest statistics — Buffett and index-fund pioneer John Bogle long used this to argue that "the best choice for ordinary people is a low-cost index fund"
- SPIVA reports (the annual tally compiled by S&P Dow Jones Indices) consistently show: in most years, 60%-90% of US active equity funds underperform the S&P 500, with the underperformance share even higher over 10-year horizons (per the latest SPIVA report)
💡 Long term, the market does not let most participants beat it
"Over the long run, the market does not let most participants beat it." SPIVA reports show 60%-90% of active equity funds underperform the S&P 500 in most years — cost disadvantages, turnover drag, timing errors, and size constraints form structural obstacles, and ordinary investors can rarely pick the few winners in advance.
- Why? Cost disadvantage + turnover drag + timing errors + size constraints. "Over the long run, the market does not let most participants beat it."
- Excellent active funds do exist, but you can hardly know in advance which one is excellent — that is the cruelty of "mean reversion".
6. Dollar-Cost Averaging: Cost Averaging and the Smile Curve
Dollar-cost averaging (DCA) = investing a fixed amount on a fixed cycle (e.g., monthly) into the same fund, without timing.
Why it works: cost averaging
The same 1,000 yuan monthly buys different units at different prices:
| Month | NAV | Units bought |
|---|---|---|
| January | 2.00 | 500 |
| February | 1.00 | 1000 |
| March | 1.00 | 1000 |
| April | 2.00 | 500 |
Total invested 4,000 yuan for 3,000 units → average cost 1.33 yuan, and the ending NAV is 2.00 → a profit of 50%+. The lower the price, the more you buy; the cost is averaged down automatically.
The smile curve
NAV ─────────────┐
│ Declining phase (DCA accumulates units)
└────────────┘ Rebounding phase (break even then profit)
The whole U-shape is the "smile curve": no panic on the decline, keep buying, harvest on the rise- The DCA investor does not bet on the bottom; they trade discipline for time. It suits broad-based indexes with long-term uptrends (CSI 300, S&P 500, Nasdaq, etc.)
- Note: DCA does not change the asset's own risk — if you are DCA-ing into a garbage asset, you will only lose more and more; giving up mid-decline = the smile curve only smiled its first half
💀 DCA does not change the asset's own risk
If you are DCA-ing into a garbage asset, you will only lose more and more. DCA trades discipline for time, and its premise is an asset that rises over the long run; giving up mid-decline means the smile curve only smiled its first half, and your principal stays trapped all the same.
Who it suits and caveats
| Suits | Does not suit |
|---|---|
| People with steady income and no timing skill | People chasing quick riches |
| Long-term goals (retirement/education) | Those who cannot bear drawdowns (DCA can also sit 30%+ underwater) |
| Broad-based indexes at non-extreme valuations | Single stocks/single themes (no mean reversion in the swings) |
7. QDII and Cross-Border Investing
QDII (Qualified Domestic Institutional Investor) funds = public funds that, holding FX quota granted to domestic fund companies, invest in offshore markets (US, HK, Japanese, European stocks, overseas bonds, etc.) — the main legal and compliant channel for ordinary renminbi investors to access overseas markets (besides Stock Connect, which covers HK stocks only).
Two core risks
- Quota limits: SAFE grants each fund company a quota; when it runs out → the fund suspends subscriptions (sell-only) → secondary price decouples from NAV → persistent high premium
- Premium risk: premium = on-exchange price ÷ NAV − 1. QDII ETF premiums of 5%-20% or higher have been common historically. Those buying at the top lose heavily from premium normalization even if the overseas asset does not fall. Always check the premium before buying QDII.
Practical points
- Where to look: fund announcements, and the gap between the "IOPV/reference NAV" and the price shown in quote software
- A premium above 2%-3% is a red flag (gold QDII and Nasdaq ETFs are premium disaster zones)
💀 Buying QDII at a high premium is handing money away
QDII ETF premiums of 5%-20% or higher have been common historically. Those buying at the top lose heavily from premium normalization even if the overseas asset does not fall. Always check the premium before buying QDII — treat anything above 2%-3% as a red flag.
- Off-exchange subscription → on-exchange sale arbitrage is impractical for retail investors (long redemption cycles, premium decay over time)
8. Major A-Share Broad-Based Indexes
| Index | Constituents | Characteristics |
|---|---|---|
| SSE 50 | The 50 largest by market cap on the Shanghai exchange | Mega-cap blue chips, heavy financials weight |
| CSI 300 | Top 300 by cap across Shanghai and Shenzhen | The A-share benchmark index, large-cap blue chips |
| CSI 500 | Ranks 301-800 by cap | Mid-caps, strong growth character |
| CSI 1000 | Ranks 801-1800 by cap | Small caps, high elasticity, high volatility |
| ChiNext Index | Top 100 by cap on ChiNext | Heavy growth/tech/pharma weight |
| STAR 50 | Top 50 by cap on the STAR Market | Hard tech (semiconductors, biopharma) |
Index constituents are rebalanced periodically — latest constituents and weights follow the listed companies' announcements and index-company publications. There are also new broad-based indexes such as "CSI A500" (launched 2024, per the latest).
9. ETF Selection List (example tickers)
⚠️ The tickers below are teaching examples only — products may be delisted, renamed, or change their fee rates. Verify against the latest fund announcements and quote software before ordering. Shanghai and Shenzhen tickers differ in length (Shanghai 510xxx/588xxx etc., Shenzhen 159xxx).
| Objective | ETF example (tickers per latest) | Notes |
|---|---|---|
| A-share large cap | CSI 300 ETF (510300) | One of the largest broad-based funds |
| A-share mid cap | CSI 500 ETF (510500) | Mid-cap representative |
| A-share small cap | CSI 1000 ETF (512100 etc.) | High elasticity |
| ChiNext | ChiNext ETF (159915) | Growth style |
| STAR Market | STAR 50 ETF (588000 etc.) | Hard tech |
| HK stocks | Hang Seng Tech ETF (513180 etc.) | China concept/HK tech |
| US stocks | Nasdaq ETF (513100) | US tech; mind the premium |
| Gold | Gold ETF (518880) | Tracks gold price |
| Bonds | Treasury ETF (511010 etc.) | Rates asset |
| Money market | Money ETF (e.g., Yinhua Rili 511880) | Idle-cash management |
Selection logic checklist:
- Check size and liquidity: large size, high turnover → smaller spread, less prone to discounts
- Check tracking error: the smaller the better (reflects replication quality)
- Check fee rates: lower management fees help over the long run
- Check premium (especially QDII): skip anything above 2%-3%
Risk Warning
⚠️ Risk Warning
Funds are not "guaranteed" products: index funds can go nowhere for years (if bought at extreme valuations or in a prolonged bear market), active funds can underperform the index, and QDII carries the double risk of FX swings and premium normalization. DCA presumes an asset that rises long term — DCA-ing a garbage asset only amplifies losses. Past returns do not guarantee future performance. All fee rates, tickers, index compositions, and return figures in this article are teaching-basis — always defer to the latest announcements and quotes. This article does not constitute investment advice.