New Bill Forces Index Funds to Dump All Chinese Holdings Within 180 Days, Facing Massive Fines

The “No China in Index Funds Act” is exactly what it sounds like: a bill designed to yank U.S. investment exposure away from companies associated with the People’s Republic of China (PRC). If this passes, it means your 401(k) or brokerage index fund—the one designed to passively track the market—will no longer be allowed to hold stock in any company defined as “Chinese.”

This isn’t just about future investments. The bill requires index funds to sell off any existing holdings in Chinese companies within 180 days of the law taking effect (Sec. 3). The definition of a “Chinese company” is broad, covering entities based in the PRC, or those where the PRC government has control, or even companies that get “most of their value” from another PRC-defined entity, as determined by the SEC (Sec. 2). That last part gives the SEC significant power to decide who makes the blacklist, potentially capturing companies you might not immediately think of as Chinese.

The 180-Day Fire Sale Risk

The most immediate and potentially disruptive part of this bill is the 180-day grace period for existing investments. Think of it this way: index funds are massive pools of capital. If every major U.S. index fund suddenly has six months to dump billions of dollars in stock from specific companies—say, large tech or manufacturing firms—that creates a huge supply of sellers and few buyers in a short window. This mandatory, rushed divestment could temporarily depress the market prices of those specific stocks.

Why does this matter to you? If you’re invested in an index fund, fund managers will have to incur transaction costs to sell these holdings quickly. More importantly, this forced selling could impact the performance of your index fund, especially if the fund is forced to sell at a lower price than they might have otherwise received. For the average person saving for retirement, this introduces a mandatory, government-driven change to the structure and cost of passive investing.

Big Fines for Small Mistakes

Compliance is going to be a high-stakes game. If a fund violates the prohibition—even accidentally—the civil penalty is severe: the greater of $250,000 or double the dollar amount of the transaction that caused the violation (Sec. 3). For a large index fund making routine trades in the millions, that fine could be astronomical. This high penalty structure means fund managers will be highly motivated to stay far away from the line, potentially leading them to sell off holdings that are only borderline defined as “Chinese” just to avoid the risk. This regulatory caution could further restrict the investment universe available to index fund investors.

What It Means for Your Portfolio

Index funds are popular because they offer broad diversification and low fees. This bill directly interferes with the “broad diversification” part by mandating the exclusion of a significant segment of the global economy. While the bill aims to reduce U.S. exposure to potential geopolitical risks, the practical effect for investors is that their index fund will no longer accurately track the global market. This could lead to what’s called “tracking error”—the fund’s performance deviates from the index it’s supposed to follow—and potentially limit returns compared to funds not facing these restrictions. The bill essentially forces a shift in how passive funds operate, adding a layer of mandatory political exclusion to what was previously a purely economic investment strategy.