To determine whether an index is worth investing in, you should first assess whether the investment style represented by the index aligns with your risk preference. Next, evaluate whether the index's valuation level is reasonable. Finally, choose an enhanced index fund with low tracking error or potential excess returns.

The CSI 300 Index selects the top 300 stocks from the Shanghai and Shenzhen stock exchanges based on two fundamental criteria: market capitalization and liquidity, forming a basket portfolio.

How is it different from the SSE 50 and Shenzhen 100?

The SSE 50 and Shenzhen 100 only include 50 and 100 stocks from the Shanghai Stock Exchange or Shenzhen Stock Exchange, respectively, while the CSI 300 covers stocks from both markets, better representing the overall market's top companies.

If you only invest in Shanghai or Shenzhen stocks, it’s difficult to fully reflect the broader market. Therefore, buying the CSI 300 is equivalent to investing in the top 300 most outstanding companies across the entire market.

Top 18 Stocks by Market Cap in the CSI 300

If you only invest in the SSE 50, you’d miss out on excellent companies like Midea Group, Gree Electric, and Vanke.

In other words, the CSI 300 is more stable compared to the CSI 500. The CSI 500 excludes the CSI 300 stocks and selects the next 500 stocks by total market capitalization, forming a basket of relatively smaller companies.

This difference is evident in their volatility. The CSI 300’s 1-3 year volatility is significantly lower than the CSI 500’s. From 2011 to 2015, the CSI 300’s volatility was around 20%, while the CSI 500’s was 30%. However, higher volatility also means greater potential returns—this is the fundamental difference between the two indices.

Overall, the CSI 300 covers large-cap stocks, offering broader stability and suitability for conservative investors. The CSI 500 primarily includes small and mid-cap stocks, offering higher growth potential and suiting aggressive investors.

From a valuation perspective, the CSI 500 is currently at a historically low level, while the CSI 300 is only relatively undervalued.

This means the CSI 500 is very close to its historical lowest valuation, while the CSI 300 and SSE 50 still have some distance. Thus, the CSI 500 offers a better margin of safety and potentially higher future returns. Since no one knows whether the market will remain bearish, a lower valuation provides relatively more safety.

Moreover, looking at the annual returns of the CSI 300 and CSI 500 over the past decade, the CSI 500’s cumulative returns are significantly higher, while the CSI 300 is noticeably more stable.