Kotak Nifty Alpha 50 ETF (KNA50) will be the sixth new fund offer (NFO) from the house in CY2021. This is the first scheme that will track the Nifty Alpha 50 Index, a benchmark which was launched in 2012.
What is the scheme about?
By tracking the Nifty Alpha Index, the ETF will invest in companies that delivered high outperformance (alpha) vis-à-vis the benchmark/market over last one year.
Stocks with the highest alpha get the highest weights in the underlying Nifty Alpha 50 Index and KNA50 will then invest in these stocks with the same weightages.
Before the top 50 alpha stocks are arrived at, the index identifies the top 300 companies in terms of average free float market capitalisation and average daily turnover for the previous six months. From this pool, the final 50 get selected.
The alpha of the stocks is measured using Jensen's Alpha. It is a measure to determine the excess return a security has generated over market returns. This is important because individual stocks may carry higher volatility, and could deliver returns that are higher than a market benchmark such as the Nifty.
“For example, if the market benchmark has given 10 percent returns, and another stock also delivers 10 percent. It is not good if the stock has a higher beta, as this means the investor has taken higher risk for the same kind of returns,” says Harsha Upadhyaya, chief investment officer, Kotak MF.
Beta is a measurement of risk that indicates how volatile a stock could be vis-à-vis the market.
Upadhyaya adds, “This ETF would complement the existing mutual fund investments of an investor, as so far this is the only product offering such a strategy.”
KNA50 follows an index that is run on a set of rules, as mentioned above. There is no involvement of active fund management, so there are no fund manager biases that can influence stock selection.
It helps that the index is rebalanced at regular intervals – once every quarter. Frequent re-balancing is important for such a fund, so that stocks no longer falling within the rules are removed swiftly.
“An alpha-based ETF is slightly better than a momentum-based strategy, as it takes into account risk-adjusted returns,” points out Nishant Agarwal, managing partner and head-family office, ASK Wealth Advisors.
The ETF tracks an index that identifies high-performing stocks. Due to their high beta, such stocks may go through periods of high volatility, especially during market corrections.
Financial planners say that with alpha strategies it is better to look for funds that are actively-managed.
“The ETF is working on the premise that stocks that have delivered alpha in past will be able to do the same in the future,” says Anubhav Srivastava, partner and fund manager at Infinity Alternatives.
“Stocks that have generated alpha may not necessarily do so in the future. Finding alpha ideas would be better-served through a fund manager actively engaging with managements of different companies to find attractive investment ideas,” Agarwal says.
There is growing interest in rule-based funds
that follow single or multiple factor-based strategies. Such funds straddle between active and passive investing. KNA50 is suitable for investors with high risk-appetites and have exhausted all the regular mutual fund categories. The NFO is open till December 15, 2021.