Analysis of the Impact of Annual Index Rebalancing Mechanisms on Different Types of Index Funds

On December 12, 2025, after the market closed, major indices in China completed their annual sample adjustments. According to information released by China Securities Index Co., Ltd., the CSI 300 Index replaced 11 samples, the CSI Dividend Index adjusted 20 samples, and the SSE 50 Index replaced 4 samples [1][2]. ETF funds tracking these indices have huge scale; the total scale of CSI 300-related ETFs alone exceeds 1.16 trillion yuan [1].

Market capitalization indices (such as CSI 300, SSE 50) rebalance mainly based on market capitalization and liquidity rankings. This rebalancing shows obvious “new quality productivity” characteristics:

• Newly added: Shenghong Technology, Dongshan Precision, Rockchip, Kuang-Chi Technologies, Enlight Media, etc. (11 tech stocks)
• Removed: Foster, Flat Glass, TCL Central, Lu’an Environmental Energy, etc. (traditional industry stocks)
• Industry weight changes: Information technology sector weight increased by 1.46%, communication services sector weight increased by 0.75% [1]

• Added: SAIC Motor, Northern Rare Earth, Huadian New Energy, Sugon
• Removed: Poly Development, China Mobile, China Aluminum, CRRC [2]

1. Industry structure optimization
   : After adjustment, the CSI 300 Index’s “new quality productivity” characteristics are significantly enhanced, more aligned with the current tech-dominant market structure [1]

2. Valuation level changes
   :
   • Financial sector weight dropped from 35.45% in 2016 to 22.97%
   • Information technology sector increased from 9.22% to 20.38% [2]
   • This structural change is expected to boost the index’s growth and valuation potential

3. Liquidity enhancement
   : Newly added constituent stocks are mostly rapidly growing tech leaders with high trading activity, helping to improve the overall liquidity of the index [2]

As a typical strategy index, the CSI Dividend Index has a completely different rebalancing mechanism:

• Select companies with consecutive dividends over the past three years and moderate dividend payout ratios
• Rank by average dividend yield over the past three years from high to low
• Select the top 30 securities as index samples [3]

• Average dividend yield of newly added constituent stocks is over 5%, while that of removed ones is below 3%
• Total market capitalization of newly added 20 constituent stocks reaches 3 trillion yuan, a significant increase compared to removed ones
• Average daily turnover increased from 4.9 billion yuan to 9.6 billion yuan [3]

1. Dividend yield improvement
   : Removed low-dividend yield stocks like Kibing Group, Xingang Steel, etc., increasing the overall yield level [3]

2. Valuation increase
   :
   • Average PB of newly added constituent stocks is 1.94, higher than removed ones
   • Number of stocks below net asset value decreased by 6, reducing the safety margin to some extent [3]
   • But this also reflects market recognition of the newly added stocks

3. Volatility increase
   : Newly added constituent stocks have larger annual amplitude, possibly making the dividend index slightly less stable [3]

1. Tech attribute enhancement
   : Adjusted indices include more emerging industry leaders, further enhancing tech attributes [2]

2. Sector rotation effect
   : Indices achieve “fixed index, changing sectors” through rebalancing, dynamically adapting to market structure changes [3]

3. Long-term trend following
   : Investors in these indices can continuously share the dividends of China’s tech industry progress [2]

1. Stable strategy logic
   : The dividend index’s dynamic rebalancing mechanism anchored on high dividends ensures continuous locking of high-dividend quality assets [3]

2. Improved sector diversification
   : This adjustment replaced some financial and real estate stocks with consumer sector stocks, helping to enhance sector diversification [3]

3. Maintained defensive attributes
   : In the current volatile market environment, dividend indices remain an investment choice to hedge market risks [3]

Focus on adjusted market cap index funds, especially CSI 300-related ETFs. The increased “new quality productivity” content in the adjusted index is expected to benefit from the tech growth theme. Currently, the lowest management fee CSI 300 ETF is China Asset Management’s (513330.SH) with an annual management fee of only 0.15% [1].

Dividend index funds are still the first choice for allocation. Although volatility may increase slightly after rebalancing, they still maintain high dividend and low volatility characteristics. E Fund CSI Dividend ETF (515180) and China Merchants CSI Dividend ETF (515080) both have scales exceeding 8 billion yuan, with management fees of 0.15% and 0.20% respectively [3].

1. Rebalancing friction cost
   : Trillion-scale index funds rebalancing synchronously may generate large market impact and transaction costs [2]

2. Valuation volatility risk
   : After increasing the tech weight of market cap indices, valuation volatility may increase

3. Strategy drift risk
   : Dividend indices including growth-oriented but more volatile stocks may deviate from the traditional stable positioning [3]

Annual index rebalancing is an important mechanism for market self-improvement. For market capitalization indices, rebalancing makes them more closely follow industrial structure changes and enhance growth; for strategy indices, rebalancing maintains the stability of the strategy logic while moderately optimizing the quality of constituent stocks. Investors should reasonably allocate different types of index funds according to their risk preferences, not only seizing the development opportunities of new quality productivity but also maintaining the stability of their investment portfolios.

[1] Jinling API Data - Real-time Index Quotes and Historical Price Data
[2] Securities Times - “6 Major Indices Adjustment to Take Effect Soon, Trillion-scale Funds Rebalance Synchronously! What’s the Impact?” (https://www.stcn.com/article/detail/3536348.html)
[3] Sina Finance - “Is the Adjusted CSI Dividend Index Still Worth Holding?” (https://cj.sina.cn/articles/view/5937761098/161eb0b4a0010247fe)
[4] Eastmoney - “CSI 300, STAR 50, etc. Index Sample Adjustments Take Effect After Market Close Today! Shenghong Technology” (https://finance.eastmoney.com/a/202512123589768889.html)
[5] China Asset Management Wealth - “Trillion-scale CSI 300 ETF Rebalancing Imminent! Which Targets Will Be Added?” (https://finance.sina.com.cn/roll/2025-12-10/doc-inhahtci0623985.shtml)