Axis Consumption ETF new fund offer review: Should you invest?

Consumption funds are underperforming the other diversified schemes. However, there are many investors who want to benefit from this structurally well-diversified theme over the long term. Axis Mutual Fund is the latest entrant to this theme. It has rolled out a new fund offer (NFO) – Axis Consumption Exchange Traded Fund (ACE). Should you invest in it?

What’s on offer

ACE aims to mimic the Nifty India Consumption total return index (NICI) and generate similar returns before costs and expenses. NICI comprises 30 consumption focused companies listed on the NSE. Exposure to individual stocks is capped at 10 percent. These companies are spread across consumer goods, automobiles, consumer services, telecom, healthcare, media, textiles and other services. Though this is a thematic index, given the exposure to varying sectors, it is a broad-based themes compared to other similar offerings.

What works

The consumption theme has done well in the past. This includes all established names that have benefitted from the rising consumption in the economy. With economic growth and distribution of income, people’s spending power increases. Rising preference for premium services and branded goods have given pricing power to leading goods and services providers. Profitability and sales are expected to sustainably grow for these companies. ACE should benefit from this long-term trend. “A rising middle class and increasing urbanization should boost consumption. The younger generation prefers good-quality consumption as it becomes affluent. This will drive the consumption theme and make it a good investment,” says Ravi Kumar TV, Founder of Gaining Ground Investment Managers.

Since Axis MF has chosen to opt for an ETF that tracks the market weighted index, passive management ensures lower cost and does away with the fund manager risk. “There are a handful of companies in many sectors and the scope to generate meaningful alpha is limited. From a long-term product standpoint, index funds or ETFs offer a tactical opportunity for investors as and when they feel that such a sector or theme can give outsized returns in a relatively short period of time,” says Raghav Iyengar, Chief Business Officer, Axis Mutual Fund. While the NICI is market weighted, the index, by design, captures key companies across the consumption sphere and closely represents how they affect the ‘Man on the street’. This is what drew us to the index and hence we have launched an ETF, he adds.

What doesn’t

The consumption theme has done well over last decade. NICI has given 16.59 percent returns over last nine years compared to 15.39 percent returns given by Nifty 50 TRI.  In a low growth economy many investors opted to remain invested in high quality consumption businesses. Though this has been rewarding for investors, it has led to high valuations as well. NICI quotes at a price to earnings multiple of 60.34 and a price to book value of 8.1.

“Thematic schemes are riskier than diversified funds. ETFs, especially thematic ones, still suffer from low liquidity,” says Vinayak Savanur, Founder and CIO at Sukhanidhi Investment Advisors.

What should you do?

There are already 13 consumption-focused equity schemes, which include two ETFs tracking the NICI. Consumption-focused funds gave 49.5 percent over the last one year, compared to 58.2 percent returns delivered by large & mid-cap schemes. In the near term, the expectations of rising inflation bringing down the consumer demand as well as the profitability of consumer goods companies may play on the minds of investors.

To make money in a thematic ETF, you should have a clear understanding of the underlying segments. You have to get both the entry and the exit right. This can be a part of tactical portfolio for investors keen on avoiding fund manager risk. The NFO closes on September 13, 2021.