Three things to know about DSP Nifty 50 Equal Weight ETF

The scheme performance of DNEWE would depend on the market environment. There can be phases where the scheme, which is based on NEW50 Index can outperform the Nifty 50 returns, and phases where it can underperform. (Representative image)

DSP Mutual Fund (MF) announced the launch of a Nifty 50 Equal Weight ETF (DNEWE) on October 18, 2021.

The new fund offer (NFO) will be open for subscription from October 18, 2021, to October 29, 2021.

How will the ETF invest?

The exchange traded fund (ETF) aims to mimic the performance of the Nifty 50 Equal Weight Index (NEW50).

As the name suggests, the index has an equal weight; a 2 percent allocation to each of the stocks in the Nifty 50 index. This is what makes DNEWE different than investing in any regular Nifty 50-based fund, as such funds invest as per the weights of the stocks in Nifty 50.

The stocks in Nifty 50 have different weights, as weights are linked to the share price movement and market cap of the companies.

If the company’s stock price has been seeing a run-up, its weight is higher than the company, which is seeing its stock price decline. Similarly, companies with larger market cap are given larger weights, than companies with lower market caps.

As each company is given a 2 percent allocation, regardless of its market cap or stock performance, DNEWE offers a more diversified portfolio both in terms of stocks and sectors.

“Since you won’t know which stocks are likely to perform in future, through an equal weight strategy, you can diversify your weights equally and also spread out your risks,” says Vidya Bala, co-founder of primeinvestor.in

How will sectoral allocation differ?

An indication of how NEW50 is more diversified than Nifty 50 is the two indices sectoral allocation.

The NEW50 has a 21.7 percent allocation to the financial services sector, whereas the Nifty50 has a 37.2 percent allocation to the sector.

Similarly, the Nifty 50 has a 17.4 percent allocation to IT sector, whereas NEW50 has a 9.7 percent allocation to the sector.

Sectors that have lower weights in Nifty50 like automobiles (4.7 percent), get much larger weight in NEW50 at 11.8 percent.

What scheme performance to expect?

The scheme performance of DNEWE would depend on the market environment. There can be phases where the scheme, which is based on NEW50 Index can outperform the Nifty 50 returns, and phases where it can underperform.

An analysis of historical data of NEW50 indicates that the chances of the index outperforming Nifty 50 index is higher with longer investment period.

In five-year period, the chances of NEW50 outperforming Nifty 50 is 58 percent, whereas the chances of it outperforming Nifty 50 falls 49 percent in three-year period.

An analysis of historical data shows that NEW50 seems to do well during post-crisis recovery. In the recent post-crisis recovery from Covid-crash of March, 2020, NEW50 has given returns of 108 percent (upto March 23, 2021), while Nifty 50 has given returns of 97 percent.

Similarly, NEW50 has given returns of 95 percent post-2008 financial crisis -- between January 1, 2009 and January 1, 2010. The Nifty 50 has given returns of 73 percent in the same period.

The outperformance of NEW50 during post-crisis recoveries might be due to tendency of a broader marker recovery after a crisis, where more stocks participate in the market rally.

However, when markets are polarised -- i.e. only few index heavyweight stocks doing well like we saw in 2018 and 2019, a strategy like NEW50 tends to underperform.

An ETF’s returns might also get impacted during times of extreme market volatility.