After much contemplation, I still feel compelled to write about ETFs, especially at this particular juncture, as ETFs have become incredibly important for everyone.
In 2023, many ETF investors actually did not make any money. This is because most major indices generally trended bearish, and the opportunities for profit were in some individual stocks, or even in speculative stocks.
However, when 2024 arrived and micro-cap stocks experienced a sharp decline, the market's direction changed completely, and this change is irreversible.
The clear peak of micro-cap stocks is not a phase but a super top.
The funds that quickly consolidated were not certain blue-chip stocks and weight stocks that were being protected, but indices like the CSI 300.
When large capital began to use ETFs to bottom-fish, the market truly entered a new era of ETF investment.
In fact, the layout of ETFs started last year, but it was a very painful year.
The vast majority of indices were bearish throughout 2023, including blue-chip stocks that also headed south.
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Looking back now, it wasn't that the direction was wrong, but rather that we arrived too early; the era had not yet arrived.After the implementation of the registration system, the first thing done in the first year was to repeatedly lure investors in the direction of small-cap stocks.
To put it bluntly, the rise of penny stocks was deliberately orchestrated by the market, with the aim of trapping a large number of investors at the top.
As for index funds ETFs, throughout 2023, they have been digesting the mess left behind by public funds in previous years.
Nowadays, this mess has almost been cleaned up, and the market should return to a normal environment.
Many investors have great doubts and concerns about investing in ETFs.
I won't explain some basic questions one by one, but I will address some core issues.
1. How is the index composition of ETFs determined?
This is actually a very basic question for beginners.
ETFs are funds, not indexes, and the composition of indexes is arranged by... (The text seems to be cut off here, so I can't provide the complete translation for the last part.)There is a magical company named China Securities Index Co., Ltd., which specializes in this kind of work.
This company is jointly funded by the Shanghai Stock Exchange and the Shenzhen Stock Exchange, specifically for arranging indices. All indices are arranged by them and have been reviewed and approved by the higher authorities.
You can understand in a simple and rough way that the ETF index itself is strictly reviewed and selected by the higher authorities.
Of course, whether there is any trickery in it is unknown, but from a macro perspective, the proportion of trickery is relatively low.
Especially for large broad-based indices, the standards for inclusion in the index are relatively strict.
2. How to view the valuation of ETFs, and are they useful?
ETF is a type of fund, and the fund itself does not have a valuation, only a net value.
The valuation of an ETF is actually the valuation of the corresponding industry index.
For example, the valuation of the CSI 300 ETF can be directly referred to the valuation of the CSI 300 index.
Valuation is definitely useful because the ultimate rise and fall of the index are all centered around the valuation.Buy at low valuations and sell at high valuations; this principle never goes wrong.
However, there is a core concept here: valuation is dynamically changing. If an industry is on a downward trend and the overall net profit has decreased, the valuation level will change significantly.
The valuation method for indices is actually quite similar to that for individual stocks, but due to the larger sample size, the fluctuations will be slightly smaller.
3. Why buy ETFs instead of the industry's leading stocks?
This question has been asked many times, whether it's better to buy leading stocks directly instead of ETFs.
The answer is that buying leading stocks is definitely better than buying ETFs, but the question is what constitutes a leading stock.
The one with the highest net profit is the leader, but it does not mean that the leader's stock price will rise the best.
The one with the highest growth potential is the true leader, but how to choose the stock with the highest growth potential is a challenge.
If it's a rebound from a sharp decline, the one with the largest drop may be the leader in the rise, which is not the same as the above two types of leaders.
If choosing a leader were that simple, it would indeed be possible to invest directly without going through ETFs, and directly grasping the leader would definitely yield the highest returns.The issue lies in the fact that retail investors actually cannot grasp stock selection; it might be better to achieve an average return and choose ETFs.
4. ETFs do not fluctuate as much as stocks; where is their value?
When ETFs decline, they are often mistakenly thought to fall less but have no investment value.
This is because ETFs, which have become popular in the past two years, seem not to bring huge profit opportunities.
This is because the current market is bearish. If we look back, the pharmaceutical and liquor sectors were also soaring in the ETF market.
In other words, ETFs, like stocks, also go through bull and bear markets.
Making money by investing in ETFs in a bear market is as difficult as making money in a bear market by trading stocks.
But the biggest advantage of ETFs is that there is no risk of delisting, and there is no situation of individual stock explosions. As long as you go through the cycle, you can make money.
For example, if you buy stocks below 3000 points and they rise to 3500, you may still be losing money.
However, if you buy a broad-based index ETF below 3000 points, it is basically profitable when it rises to 3500, and that is the value.The worst investment method is to directly buy the Shanghai Stock Exchange Index ETF and then make money by following the index's ups and downs.
5. How to deal with the lag issue of ETFs?
This issue may be the biggest disadvantage of ETFs, and there is indeed no good solution.
For example, new hot spots are often unrelated to ETFs because compiling an index requires a long process.
After this process is over, it is also necessary to issue ETF funds, raise funds, and then go online, which is another long process.
Some new concepts have a speculation cycle of only a few months, which is not enough for the ETF index to go online, and investors are also very difficult to share the dividends.
There is no way to do this, those who eat crabs can earn the most, but eating crabs must also have risks.
For ETF investors, it is impossible to eat the first crab, and it can only be said that after the market matures, they can make some money by following the index.
The ETF investment tool itself does not have the function of investment with foresight and belongs to a stable investment.
6. How to make a trade-off with ETFs?There is actually no standard answer to this question.
It can only be said that for ordinary investors, broad-based indices are more secure and appropriate.
To achieve better excess returns, one must choose industry ETFs.
However, the trend of the industry, the valuation of the industry, the future of the industry, and the grasp of investment opportunities are more challenging.
Broad-based indices are cyclical on a large scale, but the cyclical nature of the industry itself may not be in sync with that of the broad-based indices.
Investors must make a comprehensive assessment themselves and have a certain analysis and judgment of the industry.
7. If an ETF is stuck, should you add to the position or cut your losses?
This question is actually the same as stock trading, but the answer is different.
If a stock is stuck, the first consideration is to cut losses, because the fundamentals and the big logic may have undergone earth-shaking changes.
If an ETF is stuck, the first thing to consider is the position, the price position, that is, the valuation position.If it's at a high position, the priority is definitely to cut losses; if it's at a low position, then the priority is to repurchase.
Because ETFs do not have absolute risks, the greatest risk is the cycle and phase, and how long the cycle needs to last to achieve the goal of making a profit.
The essential difference between the two is that ETFs will not keep going south without looking back, but individual stocks are entirely possible to go away and never return.
Why is it said that the only way out for ordinary small and medium investors is ETFs, because the registered system's sickle is really coming.
As the number of individual stocks in the market increases, you will find that even if the index rises, the proportion of stocks that fall every day will also be more.
If you look at mature markets, such as the NASDAQ in the United States, the decline of individual stocks is actually far more than our A-shares.
That is, the more garbage stocks fall, the more the index rises because the leading companies are indeed growing.
This 20-80 structure must be the final structure of the market, and investing in index ETFs has become the only way out for most people.
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