In the two years since the AI industry surged, the trading dynamics within the TMT (Technology, Media, and Telecommunications) sector have captured market attentionHistorical data indicates that whenever the trading volume of TMT approaches 40% of the total market volume, the sector often faces a periodic correction in excess returnsHowever, the market dynamics significantly shifted around the Chinese New Year in 2025. The TMT trading volume effectively broke past the 40% threshold and continued to operate at these elevated levels, a threshold previously seen as a constraint that seems to have lost its power in the current market cycle. As of now, TMT's trading volume ratio has climbed to an impressive 44%. When we analyze historical trends alongside comparisons with established markets like the United States, it appears that the upper range of TMT’s trading volume might peak between 45% and 50%.

Does this suggest that the TMT sector still possesses upward momentum? Typically, within each major cycle of the technology industry, the central trading volume proportion in TMT tends to rise due to factors such as an increase in the number of constituent stocks, enhanced market capitalization, and improved investor sentiments regarding fundamentalsNevertheless, currently, the TMT sector has seen a persistent rise reaching historical peaks. For instance, numerous representative tech stocks have substantially increased their prices in recent times, consequently elevating their valuations as well. In terms of valuation, some stocks within TMT have exhibited price-to-earnings ratios that far exceed historical averages, indicating that market expectations for future growth in the TMT sector may be overly optimistic

Advertisements

Should these expectations fail to materialize, the risk of price corrections could escalate significantly.

Concurrently, whilst TMT remains at these high levels, there is evidence that the market is pivoting towards a "selling high to buy low" strategyMajor funds experienced a net outflow of 32.5 billion CNY on the 24th, primarily within the computer sector which recorded the largest net outflowThe five sectors experiencing the highest net outflows included computing, electronics, media, pharmaceutical biotechnology, and telecommunicationsIn contrast, the sectors with notable net inflows included construction decoration, automotive, real estate, building materials, and defense industriesThis shift clearly illustrates that savvy investors have already begun withdrawing from the highly valued TMT sector in search of more promising investment opportunities.

Against this backdrop of market reallocation, the strategy focused on free cash flow is becoming an increasingly attractive investment approach. Free cash flow (FCF) represents the cash generated by a company's operational activities after capital expenditures have been deducted, serving as a critical gauge of the actual cash available to return to shareholdersIn simpler terms, free cash flow is the cash left over after a company has met its reinvestment needs, signifying the maximum amount available for distribution to capital providers without interrupting the company’s ongoing growth.

Why is the free cash flow strategy so vital at this juncture? Firstly, companies boasting substantial free cash flow imply a potent earning capacity and healthy financial condition

Advertisements

Such firms are positioned to utilize their free cash to settle debts, innovate products, repurchase shares, or enhance dividend payments, thereby augmenting shareholder valueIn times of market uncertainty, a stable cash flow provides a “safety cushion” for companies, empowering them to weather risks.

Secondly, from an investment perspective, free cash flow serves as a pivotal metric for shareholders when evaluating corporate valueCompared to net earnings and other indicators, free cash flow more accurately reflects a company's genuine operational performanceThis is because net profit can be influenced by accounting practices and extraordinary income or loss elements, creating room for manipulationOn the other hand, free cash flow is based on actual cash inflow or outflow, which better illustrates a company’s financial health and operational viability.

Take for instance some leading businesses in traditional industries; while they may not boast growth prospects comparable to those in the TMT sector, they maintain robust and stable free cash flowsThese firms tend to command a significant market share and favorable brand reputation within their industries, resulting in steady cash inflow from operational activities, with capital expenditures being relatively judicious, thus enabling them to consistently generate positive free cash flowAs the market undergoes a high-to-low transition, these firms are poised to be more readily recognized for their inherent value, thereby becoming safe havens for capital.

The Free Cash Flow ETF (159201) not only represents one of the very first ETF products embodying the free cash flow strategy, but it also stands as the sole ETF in the market tracking the Guo Zheng Free Cash Flow Index.

The Guo Zheng Free Cash Flow Index has demonstrated exceptional long-term performance, showing remarkable risk-return characteristics in total returns (inclusive of dividends). Since 2013, it has achieved an impressive cumulative increase of 604.85%, with an annualized return exceeding 18%, outperforming the major total return indices of the A-shares market; moreover, it has experienced a consecutive six-year period of positive returns from 2019 to 2024.

As a novel value strategy, the free cash flow approach represents an expansion of the dividend strategy

Advertisements

The Guo Zheng Free Cash Flow Index’s composition excludes securities belonging to the financial or real estate sectors based on Guo Zheng's industry classification standards, distinguishing itself from indices such as the CSI Dividend Index and dividend low volatility indices.

Moreover, the index compilation scheme employs negative screening based on the stability of ROE, free cash flow, operational profit margins, and other indicators, which enhances the quality of individual stocks and mitigates the risks of incorporating companies with inconsistent operations and deteriorating fundamentals into the indexThe free cash flow strategy prioritizes a company’s long-term growth potential and the sustainability of its cash flows, rather than focusing solely on short-term dividend payments, necessitating that a company not only has ample cash flow but also possesses the capability for sustained growth to discover assets poised for continuous future cash flow enhancement.

Currently, the TMT technology sector in the A-share market stands at historical highs, and the upward trend of selling high and buying low is likely to manifest gradually, rendering the free cash flow strategy an appealing investment choiceInvestors are encouraged to keep a close watch on market changes, adjusting their strategies timelyAdditionally, they may also consider utilizing the free cash flow strategy as a foundational approach for medium-to-long-term allocations.