Index-Enhanced Funds Surpass 320 Billion Yuan; Sci-Tech Funds Lag in Excess Returns

As of the end of the second quarter of 2026, the scale of public mutual fund index-enhanced funds exceeded RMB 320 billion. As of July 30, the 460 index-enhanced funds under review recorded an average excess return of 1.64% year-to-date relative to their tracked performance benchmarks. Among them, 127 funds underperformed their benchmarks, accounting for approximately 27.39%; one fund underperformed by more than 20%, and a total of nine funds underperformed by more than 10%.

Products with the worst excess returns were mainly Sci-Tech index-enhanced funds. The Sci-Tech index this year has shown extreme divergence, with heavyweight leading stocks trending strongly upward while small and mid-cap constituents continued to weaken. Most index enhancement models' long-favored factors such as small-cap, reversal, low volatility, and value have persistently failed. Combined with fast rotation in the Sci-Tech sector and crowded quantitative strategies, the enhanced portfolios struggled to outperform the benchmark index dominated by heavyweight stocks.

Performance gaps among funds tracking the same index are wide. Taking index-enhanced funds tracking the STAR Composite Index as an example, as of July 30, the difference between the highest and lowest excess returns for the year was 38 percentage points. Even with factor-neutral and optimizer risk-control constraints, index enhancement strategies cannot avoid relative exposure to certain styles and sectors in the portfolio. In years with extreme style divergence, the dispersion of excess returns widens significantly.

The market in 2026 has been exceptionally extreme. Data show that the concentration of trading volume among the top 5% of A-share stocks has reached 48%, breaking through the historical extreme of 45%. Incremental capital has consistently flowed into the same style or factor, driving up valuations of related sectors and increasing trading congestion. Once the market style reverses, the convergent strategy system triggers a synchronized pullback. Most participants tend to increase allocations only in the middle to late stages of a strong style run, failing to fully enjoy the early gains while bearing the full brunt of the subsequent reversal.

Beyond the extreme market conditions and crowded strategies, some funds still achieved excess returns. Taking Sci-Tech related index-enhanced funds as an example, as of July 30, among 57 funds, 27 recorded positive excess returns year-to-date, with one fund achieving excess returns of more than 10%. These products have more diverse strategy reserves, relatively dispersed excess returns, and strict controls on industry, market capitalization, and style exposure, ensuring that the majority of excess returns come from stock selection rather than style. Meanwhile, their multi-factor model designs employ a structured methodology to cope with changing market conditions, avoiding excessive exposure to any single methodology or style factor.