The season of "bloodletting" in the index is here! Do you understand the secrets behind the rebalancing?

Why does the frequency of index adjustments vary by type?

Every March, June, September, and December, the capital market experiences a “regular blood exchange”—the quarterly index adjustment.

For example, the Guozheng Free Cash Flow Index (related ETF: Free Cash Flow ETF 159201/Class C 023918) just completed its adjustment for the first quarter of 2026 on March 16, with the weight of oil and petrochemicals reduced by 3 percentage points and the weight of home appliances and automobiles increased by 2 percentage points. However, this time there is an interesting phenomenon—the adjusted constituent stocks numbered only 8, in stark contrast to last June’s one-time adjustment of 44 constituent stocks. Why is there sometimes a “major overhaul” and other times just a “minor adjustment”? What does it mean for ordinary investors?

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1. Which indices undergo “quarterly adjustments”?

First, we need to clarify that not all indices adjust at the same frequency. Generally speaking, index adjustments can be divided into three categories:

The first category: semi-annual adjustments, represented by mainstream broad-based indices like the CSI 300. Adjustments occur once each in June and December, and the number of adjustments generally does not exceed 10%. This is the classic adjustment rhythm for A-shares.

The second category: quarterly adjustments, represented by some strategy indices and tech-focused broad-based indices. For example, the Guozheng Free Cash Flow Index, which many of us have been paying attention to recently, adjusts quarterly, specifically on the next trading day after the second Friday of March, June, September, and December. Additionally, indices like the STAR 50 and STAR 100, which focus on hard tech, also adjust quarterly.

The third category: annual adjustments, where some dividend indices choose to adjust once a year, operating at a slower pace.

Why is there such a significant difference in adjustment frequencies? There is actually a deeper logic behind this: different types of indices weigh “timeliness” and “stability” differently. For instance, the pace of innovation in the tech sector is extremely fast; companies on the STAR Market might see a new batch of emerging players rise and others fall behind within a single quarter. Therefore, indices like the STAR 50 and the Guozheng Free Cash Flow Index adopt quarterly adjustments to more sensitively capture the latest changes in corporate fundamentals. In contrast, broad-based indices like the CSI 300, which represent the overall national economy, prioritize “stability,” so adjusting once every six months is usually sufficient without needing frequent changes.

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Where can we find adjustment information?

So where can we find this adjustment information? Here’s an authoritative channel: the official website of the index company. For example, major domestic index publishing institutions include the China Securities Index Company and the Guozheng Index Company. You only need to log onto their official websites, search for the index code you’re interested in, and you can find the “Index Compilation Scheme.” The compilation scheme clearly states: what the selection criteria are, what the weighting method is, and when the adjustment frequency is. You can also find the latest adjustment announcements.

Screenshot source: China Securities Index official website. The above indices are for demonstration purposes only and do not constitute investment recommendations.

Taking the Guozheng Free Cash Flow Index as an example, there’s another noteworthy aspect: the adjusted constituent stocks number 8, sharply contrasting with last December’s one-time adjustment of 44 constituent stocks.

Why are there so few individual stocks adjusted this time?

This relates to the index compilation rules. The selection process for the Guozheng Free Cash Flow Index has a strict screening mechanism: it excludes financial real estate, excludes those with poor ROE stability, and excludes those with low operating cash flow ratios, then selects the top 100 based on free cash flow yield ranking. The previous adjustment of 44 stocks may have been due to significant changes in corporate financial data between quarters or severe industry rotation; however, the fact that only 8 stocks were adjusted this time indicates that the overall stability of the constituent stocks is improving, and the cash flow quality of leading companies is relatively solidified, naturally resulting in a slower pace of survival of the fittest.

The above information source: Guozheng Index official website. Not a recommendation for individual stocks.

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3. What does the adjustment mean for individual stocks? Can short-term trading be done?

Next, let’s discuss a question that many people are very concerned about: can we take advantage of index adjustments to trade individual stocks for short-term gains? From a funding perspective, the logic is straightforward. When a stock is added to an index, it means there will be passive funds buying in; conversely, when it is removed, the corresponding passive funds will sell out. This buying and selling behavior itself will have some impact on stock prices.

However, I need to pour a cold bucket of water on this idea. This “benefit” is often fully gamed in advance by professional quantitative funds and arbitrage funds, and the short-term trading costs are high with significant risks.

Around the effective date of the adjustment, large amounts of funds will be concentrated in buying and selling, resulting in significant price volatility, making it extremely difficult to time the market accurately. Furthermore, returning to the original intention of index adjustments, they are not meant to create short-term opportunities, but rather to ensure that the index always maintains “representativeness.” Therefore, it is not recommended for everyone to engage in short-term speculation around index adjustments.

Investors trade the above ETFs in the securities market like buying and selling stocks, with the main costs being brokerage fees and fund operating expenses (including a management fee of 0.15% per year and a custody fee of 0.05% per year, both deducted from fund assets), with a primary market subscription/redemption fee rate of <0.50%. The Huaxia Guozheng Free Cash Flow ETF initiates Class C with no subscription fee, but charges a sales service fee of 0.2% annually, and redemption fees: holding period <7 days, 1.5%; holding period ≥7 days, 0%. Class A fund subscriptions incur a one-time subscription fee with no sales service fee; Class C has no subscription fee but charges a sales service fee. Due to differences in fee structures and establishment times, long-term performance may vary significantly; please refer to the product’s regular reports for details.

Risk Warning: This information is for service purposes only and does not constitute a recommendation for individual stocks, nor does it constitute substantive advice or commitments to investors, nor is it a legal document. 1. The risk levels of the above ETFs and corresponding linked funds are all R4 (medium to high risk), and the specific risk rating results are subject to the ratings provided by the fund manager and sales institutions. 2. ETFs face major risks such as deviations of the target index returns from the average stock market returns, index volatility, and deviations of the fund’s investment portfolio returns from the target index returns. Linked funds face unique risks such as tracking deviation risks and performance discrepancies with the target ETF, and past performance of the market or related products does not guarantee future results. 3. Before investing in funds, investors should carefully read the fund’s “Fund Contract,” “Prospectus,” and “Product Information Summary” and fully understand the fund’s risk and return characteristics and product features, and consider their own risk tolerance based on factors such as investment objectives, investment duration, investment experience, and asset conditions, making rational judgments and careful investment decisions based on an understanding of the product situation and sales appropriateness opinions, and independently bear investment risks. 4. The fund manager does not guarantee that the fund will achieve profits or guarantee minimum returns. The past performance of the fund and its net value does not indicate its future performance, and the performance of other funds managed by the fund manager does not guarantee the performance of this fund. 5. The fund manager reminds investors of the “buyer beware” principle of fund investment. After investors make investment decisions, they bear the investment risks arising from the fund’s operating conditions, the fluctuations in the trading price of fund shares on the market, and the changes in the fund’s net value. 6. The registration of the fund by the China Securities Regulatory Commission does not imply a substantive judgment or guarantee of the fund’s investment value, market prospects, and returns, nor does it imply that investments in the fund are risk-free. 7. The product is issued and managed by Huaxia Fund, and the distribution institutions do not bear the investment, redemption, and risk management responsibilities of the product. 8. The market has risks, and investors should be cautious.