The past July may have been the most challenging month for many investors this year. The Shanghai Composite Index fell approximately 6% for the month, while the once high-flying STAR 50 and ChiNext indices closed with monthly losses of roughly 26% and 23%, respectively. The sectors that had rallied the most became the hardest-hit areas during this sharp decline. As market sentiment rapidly shifted from euphoria to panic, a key question emerged: In a more volatile market, how much protection can diversification and proper asset allocation actually provide?
Rapid Declines: Some Stocks Halve, While Broad-Based Indices Show More Restraint
During the July sell-off, the most severely impacted were the high-valuation tech stocks that had been heavily favored by concentrated fund flows. In hot sectors like memory chips, computing hardware, and optical modules, several high-profile stocks saw their prices nearly halved within a single month. For instance, memory chip leader Shenzhen Desay fell nearly 60% in July, while GigaDevice and Biwin Storage both experienced declines of over 50% during the month.
However, when we shift focus to broad-based indices, the picture appears somewhat more "orderly." The ChiNext Index and the STAR 50 Index, which also cover the tech and growth sectors, experienced adjustments of around 20% for the month. While significant, these declines were far more "controlled" compared to the halving of individual stocks. The CSI A500 Index, which includes leading companies from various sectors and is more balanced in style, fell by only about 11% in July, and the CSI 300 Index dropped by just 8%.
Why is the difference so stark, even when both are exposed to the "tech" theme? The answer lies in the word "diversification." A broad-based index comprises dozens or even hundreds of constituent stocks. Even if a few individual stocks plummet or "blow up," the drag on the overall index is significantly diluted. An index does not halve just because one or two stocks halve. This is the most fundamental and direct "moat" that diversification provides during a sharp market downturn.
Capital Flow Signals: Why Broad-Based ETFs Attract "Buying on Dips" During Declines
If the theory of diversification isn't convincing enough, the capital flow data from July offers a more tangible answer. During the market's sharp drop, substantial funds were flowing into broad-based ETFs. Balanced indices like the CSI 300 and CSI A500, as well as growth-oriented indexes like the STAR 50 and ChiNext, became the primary battlegrounds for capital absorption. According to Wind data, stock ETFs saw net inflows of approximately 480 billion yuan in July, setting a new monthly record for stock ETFs. Of this, broad-based ETFs alone captured 315.66 billion yuan.
Why are broad-based ETFs receiving such steadfast capital "votes" during market volatility? Some analysts believe that when market divergence is significant and individual stock risk is difficult to assess, investing through broad-based indices allows investors to control individual stock risk while retaining the ability to participate in any subsequent recovery. It also offers a low-cost way to gain exposure to an entire growth or core asset sector in one go. This is precisely why diversification attracts capital during market swings—not to "maximize gains," but to "ensure participation."
Prioritizing Allocation Over Selection
At this point, it's important to consider another crucial perspective. When faced with a multitude of index products, investors often habitually ask "which one is better?"—be it the CSI A500, CSI 300, ChiNext, STAR 50, or various industry themes and style factors. Which has the highest potential? Which is more stable? This is a common pitfall for investors. The reality is that different indices are not "either-or" substitutes for each other; they can play distinct roles within a portfolio, forming an asset allocation framework.
Some analysts suggest that a healthy allocation framework should consider both an "offensive" and a "ballast" component. The offensive part is designed to capture upside potential during rallies, while the ballast is intended to smooth out volatility and reduce overall portfolio drawdowns during periods of turbulence, aiming to capture the market's average return. The specific allocation ratio between the two depends on each investor's tolerance for volatility.
For example, if an investor is optimistic about a market rebound, they might maintain a higher allocation to offensive positions. For this part of the portfolio, options like E Fund ChiNext ETF (159915) and E Fund STAR 50 ETF (588080) could be considered. The former focuses on the core weight of the ChiNext board and is the largest ETF tracking the ChiNext Index. The latter gathers the hard-tech leaders of the STAR Market and is expected to continue benefiting from the growth cycle of domestic AI computing power demand.
However, if an investor prioritizes portfolio stability, they might allocate more to the "ballast" component. For this part, options like E Fund A500 ETF (159361) or E Fund CSI 300 ETF (510310) could be suitable. These indices cover leading companies across various sectors and offer a more balanced style, making them suitable for long-term core holdings. All these ETFs feature a management fee rate of 0.15% per year, which is among the lowest tier in the market. Investors without a stock account can also participate through related ETF feeder funds, such as E Fund ChiNext Index Feeder Fund (A/C/Y: 110026/004744/022907), E Fund STAR 50 Index Feeder Fund (A/C/Y: 011608/011609/022895), E Fund CSI A500 Index Feeder Fund (A/C/Y: 022459/022460/022930), and E Fund CSI 300 Index Feeder Fund (A/C/Y: 110020/007339/022928).
Truly effective diversification isn't about picking one product from a few; it's about constructing a personal allocation plan that combines offense and defense according to your own risk tolerance. This process of allocation is the crucial step that turns diversification from a "concept" into a "practice."
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