Index Funds vs Equity Index Funds Explained

What kind of category is a fund that passively tracks an index?

An index fund is a category of fund whose objective is to track the performance of a specific index. The core of its operation lies in replicating the index rather than relying on the active stock-picking judgement of a fund manager. Whether the underlying benchmark is an equity index, a bond index or a commodity index, the fund seeks—through full replication, sampling replication or other methods—to align its return profile as closely as possible with the tracked benchmark index, aiming for a small tracking deviation and tracking error.

Within mainland China, index funds are governed by the Guidelines No. 3 for the Operation of Publicly Offered Securities Investment Funds—Guidelines for Index Funds (hereinafter the "Index Fund Guidelines"), a document issued by the China Securities Regulatory Commission on 18 January 2021 and effective from 1 February of the same year. It sets out clear requirements regarding the index a fund tracks and the manager's operations.

• The index compilation methodology is publicly disclosed and transparent, with clear and verifiable rules.

• The benchmark index possesses sufficient market representativeness.

• The constituent securities are reasonably diversified, avoiding excessive concentration.

• A regular information disclosure mechanism is established to safeguard the right of holders to be informed.

• The manager must control the fund's tracking error and deviation, so that the net asset value trend closely follows the benchmark index.

It is therefore clear that an index fund is a broad category of fund whose core strategy is the passive tracking of an index. It can encompass various types such as equity index funds, bond index funds and commodity index funds, and does not refer to any single product alone.

How should tracking deviation and tracking error be understood?

The two core metrics for measuring the quality of passive tracking are tracking deviation and tracking error, which are often confused. Tracking deviation refers to the difference between the fund's net asset value return and the benchmark index return, reflecting the degree of alignment at a given point in time; tracking error is the standard deviation of the tracking deviation, reflecting the stability of tracking over a period. The closer these two metrics are to zero, the more closely the fund is generally tracking the benchmark index.

In practice, the fund contract will usually specify control targets. Taking certain products as an example, they undertake that, under normal market conditions, they will strive to keep the absolute value of the average daily tracking deviation within 0.2% and the annual tracking error within a specified figure. The calculation method can be expressed as follows:

Tracking deviation is written as

Tracking deviation = Fund NAV return - Benchmark index return

What features does the branch focused on equity indices possess?

An equity index fund is a sub-category of index funds whose tracked index is confined to the equity market, such as the CSI 300, CSI 500, Nasdaq 100 or S&P 500. Its investment portfolio consists almost entirely of equities, representing the performance of the equity market as a whole or of a particular sector. This branch is the most widely encountered passive investment tool for domestic investors.

Equity index funds commonly take three main forms, each corresponding to different trading scenarios and investor habits.

1. Exchange-Traded Fund (ETF): can be bought and sold in real time on a stock exchange like a share, offering strong liquidity.

2. ETF feeder fund: invests around 90% or more of its assets in the target ETF and supports over-the-counter subscription and redemption, making it convenient for investors who have not opened a securities account to participate.

3. Over-the-counter index fund: subscribed and redeemed at net asset value through the fund company's direct sales or third-party platforms, making it more suitable for regular fixed-amount investment.

The common objective of these products is to closely track the performance of an equity index, helping investors obtain the market's average return at a relatively low cost. Among them, the calculation method for the fund unit net asset value can be expressed as follows:

Fund unit net asset value is written as

Fund unit NAV = (Total fund assets - Total fund liabilities) / Total fund units

Where does the core distinction between two similar concepts lie?

All equity index funds are index funds, but not all index funds are equity index funds. Although the two names are similar, they differ significantly in scope of definition, investment targets and suitable audiences. An index fund is the broader, superordinate concept, encompassing indices across equities, bonds, commodities and more; an equity index fund is the branch within it that specifically tracks equity indices. The table below compares the two across several dimensions, making it easy to quickly judge which category better suits your own investment objectives.

In the domestic market, because equity index funds account for a relatively high proportion, and ETFs have developed rapidly in recent years with strong liquidity, many investors in everyday conversation directly interpret "index fund" as "equity index fund" or "ETF". However, in terms of regulatory definition and investment scope, index funds have a broader extension, also including bond, commodity and other indices, and the two should not be simply equated.

What landmark changes occurred in domestic index investing in 2025?

Index funds—particularly equity index funds represented by ETFs—saw a landmark leap in scale in 2025. The following developments reflect, in a concentrated way, the evolution of the domestic passive investment ecosystem, and help in understanding the current market position of index funds.

1. Timing and scale: During 2025, the domestic ETF market successively broke through the RMB 4 trillion, 5 trillion and 6 trillion marks. As at the end of 2025, the number of ETFs listed on domestic exchanges reached 1,381, with a total scale of approximately RMB 6.02 trillion, an increase of around 61% compared with the end of the previous year.

2. Causes: On the policy front, documents such as the Action Plan for Promoting the High-Quality Development of Indexed Investment in the Capital Market and the Implementation Plan for Promoting the Entry of Medium- and Long-Term Funds into the Market were successively introduced, providing a clear top-level design for indexed investment; on the tool front, the convenient allocation properties of ETFs across equities, bonds, commodities and other assets gained wide recognition.

3. Development: In terms of structure, equity ETFs stood at approximately RMB 3.83 trillion, while bond ETFs, cross-border ETFs and commodity ETFs all recorded notable growth; medium- and long-term funds such as Central Huijin, insurers and pension funds continued to allocate via ETFs, raising the proportion of institutional holdings.

4. Industry impact: In 2025, the domestic market surpassed Japan to become the largest ETF market in Asia by scale. The scale effect of leading institutions strengthened, management fee rates were generally reduced, and "a management fee of 0.15% plus a custody fee of 0.05%" gradually became a common standard for core broad-based ETFs, lowering holding costs accordingly.

(Source: Shanghai Stock Exchange, ETF Industry Development Report (2026), published: 06/02/2026)

What does the scale expansion mean for ordinary investors?

An increase in scale and liquidity generally means narrower bid-ask spreads, lower trading costs and a more complete product line-up. For investors who use equity index funds as their main tool, this both broadens the range of options and raises the bar for product selection: scale, liquidity, fee rates and tracking error together form the key coordinates for measuring the operational quality of an index fund.

How can you judge which type of index fund better suits your objectives?

Whether to choose an index fund or an equity index fund depends on your investment objectives, trading habits and risk tolerance. The following dimensions can be considered in turn.

• Clarify your investment objectives: if you wish to participate in the overall growth of the equity market, you may consider equity index funds such as CSI 300 ETFs or S&P 500 ETFs; if you seek relatively steady returns or risk diversification, you may consider other types of index funds such as bond index funds.

• Pay attention to the trading method: for investors who prefer real-time trading and flexible profit-taking and stop-loss, ETFs are more suitable; for investors who prefer regular fixed-amount investment or lower trading frequency, over-the-counter index funds or ETF feeder funds are more appropriate.

• Compare fees and tracking error: index funds generally have low fee rates, but ETFs carry a certain bid-ask spread and trading costs; you can consult the fund's disclosed tracking error report, where a smaller error indicates more precise tracking.

• Value index quality: give priority to indices with a transparent compilation methodology, strongly representative constituents and good liquidity; broad-based indices offer higher diversification, while sector indices are relatively more volatile but more thematic.

It should be noted that the above content is general knowledge for informational purposes and does not constitute any specific investment advice. Fund investment carries risk, past performance is not indicative of future results, and investors should make prudent decisions in light of their own circumstances.

Frequently asked questions about index funds