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Auto ETFs from Nippon Life and ICICI Prudential mutual funds: Can they drive returns for investors?

Both exchange traded funds (ETF) track the Nifty Auto Index and aim to generate returns in line with those of the benchmark

January 05, 2022 / 11:09 AM IST

The auto sector continues to be badly hit by the COVID-19 pandemic. However, a few savvy investors have started talking about the segment as one with many potential value picks. Mutual fund houses such as ICICI Prudential and Nippon India have announced the launch of Nifty Auto ETF. Does it make a good investment choice?

What’s on offer

ICICI Prudential Nifty Auto ETF (IAUTO) and Nippon India Nifty Auto ETF (NAUTO) have opened today for subscription.

Both exchange traded funds (ETF) track the Nifty Auto Index and aim to generate returns in line with those of the benchmark.

This index has 15 stocks of companies manufacturing passenger vehicles, heavy commercial vehicles, two and three wheelers, tyres, batteries and forgings. No single stock can have a weight of more than 33 percent in the index. As on December 31, 2021, the top stock in the index is Maruti Suzuki India with 19.53 percent weightage. The top three stocks account for 52.49 percent of the assets. Over a five-year period, the Nifty Auto TRI has given 4.89 percent returns annually. The price to earnings ratio of index stands at 60.71. The index is rebalanced semi-annually.

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What works

The auto sector has gone through tough times. In the initial phase of the COVID-19 pandemic, many individuals and corporates postponed their vehicle purchases. As the economy started opening up, supply chain issues started hitting automakers globally. Indian automakers also faced disruptions as semi-conductor shortage hurt sales. Rising commodity prices added to their woes.

However, the sector appears to be coming out of the woods. Commodity prices are also seen to be stabilizing. Despite the Omicron variant hitting the world towards the end of CY2021, the global economy is on track for a recovery. Experts are of the opinion that this cyclical sector may see better times ahead.

Abhishek Jain, Head of Research, Arihant Capital says, “Expectation of strong rural demand, strong balance sheets of listed companies, uptick in export revenues, electric vehicle (EV) launches by listed companies along with improvement in supply of key inputs like semi-conductors should ensure that the auto and auto ancillary companies do well in future.”

Investing through passively managed ETF ensures that the expenses are low and there is no fund manager risk.

What doesn’t

Being sector-specific offerings, these ETFs carry high risk compared to a diversified equity fund. Investors’ fortune are married to the performance of the auto sector which is battling with issues such as evolving clean fuel technologies asking for capital expenditure. The competition can also increase over a period of time which may bring down the margins of automakers.

But Jain thinks that the valuations factor in the worst possible scenario. “The demand scenario is expected to improve and the competition from new entrants in EV space appears weak as the new products launched fail to impress the auto markets. This should help the established auto makers to post good growth in future,” he adds.

Hemen Bhatia, Head ETF, Nippon India Mutual Fund says, “With most headwinds like supply constraints of semi-conductor along with increasing commodity prices behind us and with the street view moving from fear of electrification to seeing EV as an opportunity, investors will get exposure to EV theme as well, as part of the overall auto sector exposure.”

Though experts see value in auto sector stocks, this is going to be a contrarian call. And most contrarian bets take time to unfold and can test patience of investors. You have to get the timing right. Ankur Maheshwari, CEO, Equirus Wealth says, “Like any other contrarian investment, auto sector is going through many challenges. However, savvy investors must remember that the best investments are done in the worst of the times.”

With just 15 stocks in the benchmark index, these funds will have concentrated holdings. That increases volatility.

What should you do? 

Investing in an out-of-favour sector means that you must be prepared for bouts of volatility. These index ETF offerings are not meant for beginners. According to ACE MF data, as on November 30 2021, large-cap funds on an average, allocated 5.3 percent of their assets to auto and auto ancillaries sectors. There is a 4.4 percent allocation in the Nifty 100 index. So you may not be missing too much if you stay invested in diversified equity funds.

But investors keen on enhancing their exposure to auto sector may look for auto-sector focused mutual fund schemes. UTI Transportation and Logistics Fund is an actively managed fund with a relatively broader mandate of investing in shares of companies in the transportation and logistics sector. The scheme has 80 percent allocation to auto and auto ancillary stocks and has given 7.2 percent returns over the past five years.

In the auto sector the best performing stock was Tata Motors with 162 percent returns, whereas Hero Motocorp with 20.83 percent loss figures way down the list.

Maheshwari says, “Patient investors with a long enough view on the auto sector are better off investing in an actively managed portfolio. But if an investor is keen on a low cost investment option with no fund manager risk, then an ETF tracking Nifty Auto Index will serve the purpose.”

The new fund offer of IAUTO will close on January 10 and NAUTO will close on January 14, 2022.



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Nikhil Walavalkar
first published: Jan 5, 2022 11:09 am
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