Most of the thematic ETFs trade with thin liquidity, higher tracking error and higher impact cost. Performance of many thematic ETFs has been a mixed bag. However, it is worth looking at them given their investment strategy that can fit the satellite portfolio of an investor with a high risk profile
Passive investing has gained significant traction among domestic investors over the last few years. Data compiled from ACEMF shows that the assets under management (AUM) of passively managed equity-oriented funds grew by 553 percent to Rs 6.04 trillion over the last five years while the AUM of actively managed equity funds grew by 228 percent to Rs 20.02 trillion. Within the passive space, asset management companies (AMCs) offer index funds and Exchange-Traded Funds (ETFs). As far as the ETFs are concerned, they are sophisticated instruments traded like equities on exchanges. Through demat accounts, investors can buy and sell ETF units at the prevailing market prices on BSE and NSE during market hours. ETFs can be part of one’s portfolio and used for an effective asset allocation strategy. Notably, ETFs are more of an institutional play and retail participation is very low. As per the industry body Association of Mutual Funds in India’s (AMFI) latest data, high net-worth Individuals and retail investors put together constituted only 8 percent of the overall equity ETFs’ AUM. Mutual fund companies offer a wide choice of ETFs based on the broader equity indices, sector, thematic, and smart beta ETFs. On the fixed-income side, liquid and Gilt ETFs are also part of the offerings.
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Thematic ETFs invest in companies that have an interest in a common theme. They are semi-diversified as they invest in more than one sector. Currently, there are 24 thematic ETFs available in the market, including consumption, infrastructure and manufacturing ETFs. These themes are cyclical in nature and prone to higher volatility. Investors with high-risk profiles who understand themes well can consider investing in them. Remember that liquidity, tracking error (TE), expense ratio and impact cost determine the suitability of an ETF to your portfolio. Liquidity or the trading volume plays an important part in ETF selection. You may not get the desired price if the liquidity is lower, that could lead to a higher cost of acquisition. Most of the thematic ETFs are thinly traded. Bharat 22 ETF and CPSE ETF are the only two thematic ETFs that are traded with decent liquidity. Tracking error is also very important as it tells you how closely the ETF tracks its benchmark. ETFs with lower TEs are preferred. ETFs with daily TE of 0.01-0.03 percent are preferable. Most of the thematic ETFs have higher TE mainly because of the lack of price discovery due to thin liquidity. Impact cost is the difference between the ideal price of a unit and the traded price of a unit. The lower the impact cost, the better the fund return. For instance, Nippon India ETF Nifty 50 BeES has the lowest impact cost of 0.02 percent. Most of the thematic ETFs trade with thin liquidity, higher TE and higher impact cost. The performance of many thematic ETFs has been a mixed bag. However, it is worth looking at them given their investment strategy that can fit the satellite portfolio of the high-risk profile investors. It is better to have a helping hand from financial advisors while making investment decisions in these ETFs. Retail investors who want to invest can opt for a staggered way of accumulating the units from the exchanges. Below are the thematic ETFs currently available in the market. Only ETFs tracking domestic equity markets are considered. Source: ACEMF.
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Bharat 22 ETF and CPSE ETF Both CPSE ETF and Bharat 22 ETF were launched to execute the government’s divestment programme. With a large asset size of Rs 25,154 crore (CPSE ETF) and Rs 12,232 crore (Bharat 22 ETF), these ETFs trade with relatively higher volume on NSE. After a decade of underperformance, Public Sector Undertakings’ (PSUs) stocks came into limelight in the recent years thanks to the improved asset quality of PSU banks and the government’s increased capex spending. This, in turn, helped the PSU-heavy portfolio of CPSE ETF and Bharat 22 ETF deliver handsome returns over the last two-three years.
Commodities The Nifty Commodities Index that comprises 30 companies, is designed to reflect the behaviour and performance of companies representing the commodities segment, which includes sectors such as oil, petroleum products, cement, power, chemical, sugar, metals and mining, etc. The top three stocks are Reliance Industries, NTPC and UltraTech Cement.
Consumption The Nifty India Consumption Index is designed to reflect the behaviour and performance of companies representing the domestic consumption sector, which includes consumer non-durables, healthcare, auto, telecom services, pharmaceuticals, hotels, media & entertainment, etc, and where more than 50 percent of company’s revenue comes from domestic markets (other than export income). Nippon India ETF Nifty India Consumption and ICICI Prudential Nifty Commodities ETF are the two having relatively higher but thin liquidity on NSE.
Digital The Nifty India Digital Index tracks the performance of a portfolio of stocks that broadly represent the Digital theme. The sectors covered are information technology, consumer services, telecommunication and financial services. The daily average traded volume of Tata Nifty India Digital ETF over the last one year on NSE was Rs 12 lakh.
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Dividend Opportunities The Nifty Dividend Opportunities 50 Index tracks the performance of the 50 companies with a higher dividend yield that were selected from the top 300 stocks in terms of average free-float market capitalization. It is one of the strategy-based indices using the factors while constructing the portfolio. The top five stocks include ITC, TCS, Infosys, HUL and HCL Technologies.
ESG ESG stands for Environmental, Social and Governance. Mirae Asset Nifty 100 ESG Sector Leaders ETF tracks the Nifty100 ESG Sector Leaders Index that shortlists stocks from Nifty 100 that have scored well on management of ESG risks and which do not have involvement in any major controversies. ESG thematic funds are gaining traction in India, albeit slow. Recently, the market regulator the Securities and Exchange Board of India allowed AMCs to launch six different types of funds under the ESG category of mutual funds.
Financial Services The Nifty Financial Services Index tracks stocks from the Indian financial market, which includes banks, financial institutions, housing finance, insurance companies and other financial services companies. Mirae Asset Nifty Financial Services ETF has a daily average traded volume of Rs 52 lakh on the NSE.
Financial Services Ex-Bank ICICI Prudential Nifty Financial Services Ex-Bank ETF tracks the Nifty Financial Services Ex Bank Index which aims to track the performance of a portfolio of stocks from the financial services sector other than banks. While most of the active and passive funds allocate a significant allocation to banks, this ETF avoids the high beta banking stocks and provides a fair exposure to the sub-sectors other than the banks in the financial services sector such as housing finance companies, non-banking finance companies, holding companies, asset managers, insurance companies, brokerages, exchanges and new-age tech companies. These are high-growth segments in an expanding economy.
11/15
Growth Sectors Nifty Growth Sectors 15 Index is a strategy index picking the 15 high liquid stocks from the sectors with high growth potential. The index selects the sectors first based on P/E and P/B values of Nifty sectoral indices, which are compared to the Nifty 50 index. As a next step, companies with greater earnings per share (EPS) frequency are selected with preference given to companies with higher free-float market capitalization. The top three stocks are ITC, TCS and Infosys.
Infrastructure The Nifty Infrastructure Index holds the companies representing the infrastructure sector which includes companies belonging to telecom, power, port, air, roads, railways, shipping and other utility services providers. There are 24 actively managed infra mutual funds available.
13/15
Manufacturing The Nifty India Manufacturing Index selects the stocks from the combined universe of Nifty 100, Nifty Midcap 150 and Nifty Smallcap 50 index that represent the manufacturing sector. The largest sectors in the index are the automobile, capital goods, and healthcare.
MNC ETF The Nifty MNC Index comprises of 30 listed companies on the National Stock Exchange (NSE) in which the foreign promoter shareholding is over 50 percent. Top stocks include Nestle India, Hindustan Unilever, Maruti Suzuki India and Britannia Industries.
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Shariah The Nifty Shariah indices are designed to offer investors Shariah-compliant investment solutions. Shariah-compliant mutual funds are governed by the requirements of Shariah law and the principles of the Islamic religion that require you to be ethically and socially responsible when it comes to investing your money. It excludes the stocks that are part of the sectors such as banks and engaging in the business of alcohol, tobacco and gambling.
