In July, the Shanghai Composite Index dropped roughly 6%. Meanwhile, the previously soaring STAR 50 and ChiNext indices ended the month with losses of about 26% and 23%, respectively. The sectors that had rallied the hardest became the deepest casualties of the sharp sell-off. As market sentiment abruptly shifted from euphoria to panic, a key question emerges: in a market with increasing volatility, how much protection does diversification truly offer?
During the sharp sell-off: individual stocks were halved, but broad-based indexes showed more restraint
The hardest-hit areas in July's decline were the high-flying technology stocks that had been heavily favored by concentrated capital. In popular sectors like memory chips, computing hardware, and optical modules, several high-profile stocks nearly halved in value within a single month. For example, memory chip leader Desu Technology fell nearly 60% in July, while GigaDevice and Biwin Storage both dropped over 50% during the month. However, switching the perspective to broad-based indices reveals a completely different loss structure. Even those covering the same technology and growth sectors, like the ChiNext Index and STAR 50 Index, adjusted by about 20% for the month. Compared to individual stocks halving in value, these index declines were significantly more manageable. The CSI A500 Index, which covers leading companies across various industries with a more balanced style, fell by only about 11% in July. The CSI 300 Index dropped by a mere 8%. This is the core difference between concentrated stock holdings and a diversified portfolio.
The answer to this difference lies in "diversification." A broad-based index is composed of dozens or even hundreds of constituent stocks. The negative impact of a single stock plummeting or even experiencing a blow-up is significantly diluted across the entire index. An index will not be cut in half just because one or two of its components are halved. Diversification is not about making you more money; it is about ensuring you survive longer in extreme market conditions.
Liquidity signal: A 300 billion yuan "contrarian vote"
July's capital flows provided even more direct evidence. While the market was in a sharp decline, a massive amount of capital flowed into the market through broad-based index funds. Balanced broad-based indices like the CSI 300 and CSI A500, as well as growth-oriented ones like the STAR 50 and ChiNext, became the main battlegrounds for capital absorption. According to Wind data, stock ETFs saw a net inflow of approximately 480 billion yuan in July, setting a new record for monthly net inflows. Broad-based ETFs alone accounted for 315.66 billion yuan of this total. This injection of over 300 billion yuan in a single month is not a bet on a short-term rebound. It is a vote of confidence in the "only certainty within uncertainty." When market sentiment is deeply divided and individual stock risk is difficult to assess, deploying capital via broad-based indices allows investors to control individual stock risk while retaining the right to participate in any subsequent market recovery. It also provides a low-cost, one-click method to allocate across an entire growth or core asset sector. Capital's choice is never "which one will rise the fastest," but "which one will prevent you from being forced out of the game prematurely."
Prioritize "allocation" over "selection"
Faced with numerous index products, many investors habitually ask "which one is better" – the CSI A500, CSI 300, ChiNext Index, or the STAR 50? Which has the highest potential? Which is more stable? This is precisely the trap of this line of thinking. Different indices are not a binary "either-or" choice. Instead, they can play different roles within a single portfolio. A sound allocation framework should consider both an "offensive" component and a "ballast stone" component. The offensive part is responsible for capturing upside in rising markets, while the ballast stone is responsible for smoothing out volatility and reducing the overall portfolio drawdown during market fluctuations. The allocation ratio between these two depends on each individual's tolerance for volatility. You do not need to choose between "stability" and "potential." You only need to decide on the ratio between them. Therefore, the most worthwhile action now is not to agonize over "which index is better," but to check your holdings. Do you have an offensive component in your portfolio? Do you have a ballast stone? Is the ratio between them aligned with your risk tolerance? If not, now is the time to adjust. For corresponding products, investors with a preference for growth can consider the E Fund ChiNext Index ETF Feeder Fund (A/C/Y: 110026/004744/022907) and the E Fund SSE STAR 50 Index ETF Feeder Fund (A/C/Y: 011608/011609/022895). Investors with a more conservative approach can consider the E Fund CSI A500 ETF Feeder Fund (A/C/Y: 022459/022460/022930) or the E Fund CSI 300 Index ETF Feeder Fund (A/C/Y: 110020/007339/022928). The management fees for these ETF feeder funds are all at the lowest tier in the market, and they can be purchased through the fund company's direct sales platform, banks, and internet channels. MACD golden cross signal forms, these stocks are rising well!
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