Bharat 22 ETF: Should you invest and how is it different from CPSE?

The issue of the Bharat-22 Exchange Trade Fund (ETF) in November gives investors some time to think about and understand its potential profitability.

A starting point would be to understand how an ETF works. The only analogue of the Bharat-22 ETF is the Central Public Sector Enterprise (CPSE) ETF, first launched in March 2014.

The CPSE ETF comprises of 10 Public Sector Unit (PSUs) equities that came with an incentive of a five percent discount at the time of its release.There were also two subsequent further fund offers (FFO).

This ETF was put up by the centre to raise funds through systematic disinvestment in these PSUs. It is a passive securities instrument, which means that its weights for the respective equity investments in the funds are fixed.

This is where this ETF differs from a mutual fund, where the weights can be tweaked by the investment professional handling the mutual fund portfolio.

Also, an ETF can be traded on the stock exchange. The CPSE ETF consists of 10 primary investments, which include:

1. Oil and Natural Gas Corporation of India (ONGC)
2. REC
3. Coal India
4. Container Corporation of India
5. Oil India
6. Power Finance Corporation
7. GAIL
8. Bharat Electricals Limited (BEL)
9. Engineers India Limited (EIL)
10. Indian Oil

As can be seen, the fund offers a narrow, sectoral set of investments, mainly from the energy sector. Since the time of its launch in March 2014, the ETF has risen from Rs 19.36 per share to Rs 28.86 per share. This is a return of 49 percent in the three years since its release.

It must also be noted that this current value of Rs 28.86 is closest to its all-time high of Rs 30.5 per share, which it hit on May 11, 2017. The ETF’s all-time low was Rs 17.90, seen on February 12, 2016.

An interesting point is that if an investor bought into the fund at its all-time low, it would have seen a 70.39 percent return in a year of purchasing the ETF at its all-time high.

A key difference between the CPSE ETF and the Bharat-22 ETF is in the list of stocks. The Bharat-22 ETF will have a greater diversity in its investments, though the Indian Tobacco Company (ITC) will be taking up the lion’s share of the weightage.

Also, investments will be made particularly in major government banks such Bank of Baroda, State Bank of India and Indian Bank, thus further reducing the risk that comes with a focussed portfolio.
The list is as follows:

1. ITC (through SUUTI): 15.2%
2. SBI (State Bank of India): 8.6%
3. Power Grid Corporation: 7.9%
4. Axis Bank (through SUUTI): 7.7%
5. NTPC: 6.7%
6. ONGC (Oil and Natural Gas Corp): 5.3%
7. Indian Oil Corp: 4.4%
8. BPCL (Bharat Petroleum Corp Ltd): 4.4%
9. NALCO: 4.4%
10. Coal India: 3.3%
11. BEL (Bharat Electronics Ltd): 3.3%
12. EIL (Engineers India Ltd): 1.5%
13. Bank of Baroda: 1.4%
14. REC (Rural Electrification Corp): 1.3%
15. NHPC: 1.2%
16. PFC (Power Finance Corp): 1%
17. NBCC: 0.6%
18. NLC India: 0.3%
19. Indian Bank: 0.2%
20. SJVN Ltd: 0.2%