To understand index funds, one must first grasp what an index is. Simply put, there are many securities in the securities market, and the prices of different securities fluctuate constantly. An index is a reference indicator that reflects the overall rise and fall of the market in a timely manner. For example, the CSI 300 Index, which we often mention, reflects the comprehensive price changes of 300 representative stocks with strong liquidity and large scale in the Shanghai and Shenzhen markets.

Each index selects a certain number of securities as its component securities and assigns a specific weight to each security based on a certain weighting method. For instance, in a market-cap-weighted index, the larger the market capitalization of a component security, the higher its weight, and the greater its impact on the index's fluctuations.

In terms of representation, indices can be divided into broad-based indices and narrow-based indices. Broad-based indices cover a wide range of stocks and are highly representative, such as the CSI 300 and CSI 500. According to relevant standards in the U.S. market, broad-based indices generally need to meet several conditions: first, they must include 10 or more stocks; second, no single component stock can exceed 30% in weight; third, the combined weight of the top five stocks cannot exceed 60% of the index; and fourth, the average daily trading volume of component stocks must exceed $50 million. In contrast, narrow-based indices include style indices, sector indices, and thematic indices, which focus on a single industry or theme, making their objectives more concentrated compared to the diversified industries and stocks covered by broad-based indices.

An index fund is a fund product that tracks a specific index (such as the CSI 300 Index or S&P 500 Index) by investing in all or part of the index's component securities to replicate the index's performance. The primary investment goal of an index fund is to closely track the target index and minimize tracking errors, aiming to align the investment portfolio's trends with the index and achieve returns similar to those of the index.

Index funds are characterized by low fee costs, diversified investment risks, high operational transparency, and minimal influence from fund managers' subjective factors during operation. In recent years, index funds have continued to grow and expand, with product types covering domestic and international markets and multiple major asset classes, making them an important choice for asset allocation tools.