June 26, 2014
How to participate in the upcoming rally through ETF Mode?
RETAIL RESEARCH
Prologue:
The expected bull run in the domestic equity market led by the prospects of a revival in economic growth on the back of strong government at the centre offers an opportunity for investors to benefit out
from the equity investments. Despite the current and near term macro headwinds such as high retail inflation, possibility of El Nino (though a full fledged drought like conditions may not be the outcome for
India), possibility of rate hikes after the Union Budget, likely populist Budget, the uptrend in the domestic economy can largely be expected sooner or later given the increased risk appetite among the
investors.
Investors can consider ETF route to participate in the Bull Run, which is a more convenient way to invest in equity market compared to other investment options. ETFs are suited for investors who want to
follow and are willing to get returns in line with index returns. First time investors who wish to enter into equity market also can consider opting the index ETF route. Investing through staggered investment
mode like DIYSIP will further help them to accumulate cost averaging units over periods.
Provided, investors with medium risk profile can consider investing in broader market ETFs like Nifty ETFs to participate in the bull run. Nifty ETFs give a chance to participate in the most happening large
cap stocks that will ride on growth in Indian economy. Eg, GS Nifty BeES.
Investors having high risk appetite and wishing to participate in the upside can allocate a portion of investment in mid and small cap mutual fund ETFs as they have been the front runners and rise faster
than large cap counterparts in a bull run. Mid and small cap stocks are high beta stocks compared to large cap counterparts. They depreciate more when market corrects but appreciate more when the rally
starts. Further, many small & midcap companies are seen attractive on valuations. Also, many companies in this space that have emerging businesses and where there is growth will reward investors who
stay invested for a long time regardless of the market they are in. Eg, ‘GS Junior BeES’ and ‘Motilal Oswal MoSt Shares Midcap 100 ETF’.
Investors who have faith in the growth prospects of PSU stocks given the expectation over the economic recovery in the domestic front, can consider CPSE ETF. CPSE ETF is a semi diversified and thematic
ETF which tracks and provide returns corresponding to the CPSE Index, an index comprising of select heavyweight Central Public Sector Companies listed at NSE. Banking sector cannot be ignored by
investors who have faith on economic recovery of any country. GS Banking ETF and GS PSU Banking ETF are the better choice for investors who bet on banking sector.
Scheme Name
Launch
Date
Benchmark
Latest
Corpus
(Rs Crs)
Trailing Return
Expense
Ratio (%)
1
Month
Absolute
3.35
2.59
0.68
3.44
1.05
‐3.63
3
Month
Absolute
15.66
‐
25.47
31.60
24.31
54.30
GS Nifty BeES
Dec‐01
Nifty Index
552
0.54
CPSE ETF
Mar‐14
CPSE Index
2457
NA
GS Junior BeES
Feb‐03
CNX Nifty Junior
167
1.06
MoSt Shares Midcap 100 ETF
Jan‐11
CNX Midcap
266
1.00
GS Bank BeES
May‐04
CNX Bank Index
144
0.54
GS PSU Bank BeES
Oct‐07
CNX PSU Banks
14
0.81
Benchmark
Nifty
‐
‐
‐
‐
2.89
15.14
CNX Midcap
‐
‐
‐
‐
3.46
31.69
CNX Nifty Junior
‐
‐
‐
‐
0.71
25.68
CPSE Index
‐
‐
‐
‐
2.64
42.33
CNX Bank Index
‐
‐
‐
‐
0.16
23.38
CNX PSU Banks
‐4.12
53.91
Note: NAV value as of June 24, 2014. Daily average volume is calculated for YTD. Daily average volume for CPSE ETF is calculated since listed.
RETAIL RESEARCH
6
Month
Absolute
21.53
‐
25.84
36.13
36.28
51.93
1
Year
CAGR
37.04
‐
43.14
53.58
38.04
42.57
3
Year
CAGR
12.71
‐
13.91
12.63
13.34
2.31
5
Year
CAGR
13.14
‐
15.49
‐
17.65
9.79
20.93
35.85
26.69
51.86
35.12
49.49
35.60
51.84
43.72
54.24
36.96
39.93
11.47
11.52
13.72
9.37
12.13
‐0.02
12.04
14.81
15.72
12.37
16.58
‐
Tracking
Error
(Daily)
Daily Average
Traded Volume
(Rs Crs)
0.02
‐
0.05
0.05
0.85
1.32
3.82
11.6
0.54
0.10
0.54
0.10
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
Model portfolio Asset allocation among ETFs:
Index
ETF
Nifty
Nifty Junior
CNX Midcap
CPSE
Bank PSU
Bank
GS Nifty BeES
GS Junior BeES
MoSt Shares Midcap 100 ETF
CPSE ETF
GS PSU Bank BeES
GS Bank BeES
Investor’s Risk Profile
Conservative
70
30
‐
‐
‐
‐
Aggressive
40
‐
30
15
‐
15
Very Aggressive
30
‐
30
20
10
10
ETFs and their Benefits:
Exchange Traded Funds (ETFs) are open ended mutual fund schemes, which are traded on stock exchanges like a share and seek investment returns that correspond to the performance of a particular index
like NIFTY or CNX Midcap Index. ETFs combine the benefit of a mutual fund scheme with the convenience of trading like a share.
Lower expense ratio: ETFs are less expensive in comparison to other mutual fund schemes. The expense ratio of ETFs is the lowest among mutual fund schemes which ranging from 0.25% to 1% as they no
need of requiring the service of fund managers and analysts. Moreover, there is less marketing cost and commissions.
Diversification: Investments through ETFs are widely diversified as indices are constructed to represent performance of the stock market as a whole. It reduces the overall risk of one’s portfolio. ETFs enable
investors to access many stocks at a time by investing in a single option.
Transparency: Investors can access the portfolio composition of index any day at any point of time. On the other hand, portfolios of other mutual funds schemes are declared by AMCs once in a month.
No fund manager Risk: As the objective of such schemes is to mimic the performance of index which they track, they construct the portfolios same as the tracking indexes. So these funds stay away from
the risk of subjective performances and biases of fund managers.
Liquidity: ETFs are listed and traded on stock exchanges like equity shares. They can be bought and sold on real time basis at currently available prices at any time during trading hours. However, AMCs
arrange to absorb any excess supply of units that an investor would like to sell or create fresh units when the demand for units is large enough. On the other hand, other funds including index funds that are
available only at day‐end NAV.
However, investors have to consider some disadvantages of the ETFs such as mandate of Demat to invest in ETFs, brokerage and other transaction charges, premiums and discounts of market price to NAV,
Tracking Error, impact cost, etc.
Benefits of investing in an Index:
•
Investing in an index is considered as efficient investment option as the index includes large actively traded stocks from diversified and performing industries.
•
Indices are revamped periodically representing the changes in the importance of sectors and growth cycle of stocks.
•
The world changes, so the index should change. Investors benefit out of these changes as they need not take a call on entering or exiting a particular sector or stock.
RETAIL RESEARCH
GS Nifty BeES:
Year to date movement in CNX Nifty (Rebased to 100):
GS Nifty BeES is the first ETF in India which was introduced by Benchmark AMC on January 8, 2002. The
name of the Nifty BeES was changed as GS Nifty BeES as the Benchmark AMC was acquired by the Goldman
Sachs AMC on 14th July, 2011.
The investment objective of the GS Nifty BeES is to provide investment returns that, before expenses,
closely correspond to the total returns of securities as represented by the CNX Nifty Index.
Nifty ETFs are suited for conservative medium risk profile investors who want to follow and are willing to
get returns in line with Indian equity market. First time investors who wish to enter into equity market, can
also consider opting GS Nifty ETF.
Year to date, the GS Nifty ETF posted 21% of absolute returns.
About CNX Nifty Index: The CNX Nifty is NSE’s benchmark index for Indian equity market introduced in
November 1995. CNX Nifty is a more diversified index, accurately reflecting overall market conditions of
Indian equity market. The CNX Nifty contains 50 stocks and covers 22 sectors of the Indian economy and
offers investment managers exposure to the Indian market in one portfolio. It is a free float market
capitalisation weighted index.
Discount (+) / Premium (-) of Spot Price to NAV of GS Nifty BeES:
GS Nifty Bees gives a chance to;
•
•
•
•
•
Participate in the most happening large cap stocks that will ride on growth in Indian economy,
Incur low cost in terms of expenses of scheme (compared to a diversified fund) or lower
transaction costs (in the case of direct equity requiring frequent reshuffling),
Go in for SIP and take advantage of volatility in the markets to arrive at a lower entry level,
Avoid possibility of underperforming the benchmark,
Avoid the need of constantly monitoring and reviewing portfolio.
Features of GS Nifty BeES:
•
•
•
•
•
•
•
•
•
First Exchange Traded Fund (ETF) in India.
Combination of a share and a mutual fund unit.
Real‐time Trading on NSE.
Real‐time Indicative NAV.
Available across NSE terminals.
Tracks the S&P CNX Nifty Index.
Priced at 1/10th of the Nifty Index.
The maximum total expense ratio is 0.80% per annum.
Structured as a Mutual Fund under the SEBI 1996 regulations.
RETAIL RESEARCH
Daily traded volume in GS Nifty BeES on NSE in the last 6 months:
GS Junior BeES:
Year to date movement in CNX Nifty Junior Vs. Nifty and CNX Midcap:
GS Junior BeES is tracking CNX Nifty Junior Index as a benchmark which consists of next rung of 50 most
liquid stocks after S&P CNX Nifty which are smaller and riskier than Nifty.
The likelihood equity market rally going forward provides a better opportunity for investors to allocate
notable portion especially in mid and small cap stocks as they have been the front runners in the initial
market rally and rise faster than large cap counterparts in a bull run.
GS Junior BeES is suited for long term investors who want to get higher returns than that of Nifty with
slightly higher risk. CNX Nifty Junior Index contains a mix of large and mid stocks in its index having a high
degree of liquidity defined in terms Impact Cost.
Basic facts on GS Junior BeES:
•
•
•
•
GS Junior BeES gives a chance to participate in the next rung of 50 most liquid, emerging stocks
after S&P CNX Nifty large cap stocks which will ride on growth in Indian economy.
Tracks the CNX Nifty Junior Index and priced at 1/100th of the CNX Nifty Junior Index.
Listed and traded on the capital market segment of NSE.
Minimum lot‐size for real‐time in‐kind creation / redemption with the fund is 16,000 units and in
multiples thereof.
Discount (+) / Premium (-) of Spot Price to NAV of GS Junior BeES:
Year to date (as of 24 June 2014), the CNX Nifty Junior delivered 25% of returns while the Nifty index posted
20%.
Facts on CNX Nifty Junior Index (benchmark of GS Junior BeES)
•
•
•
•
•
CNX Nifty Junior was introduced on January 1, 1997, with base date and base value being
November 03, 1996 and 1000 respectively and a base capital of 0.43 trillion.
The next rung of liquid securities after S&P CNX Nifty is the CNX Nifty Junior. So it contains a mix
of large and mid cap stocks. S&P CNX Nifty and the CNX Nifty Junior make up the 100 most liquid
stocks in India.
Only companies having a high degree of liquidity defined in terms Impact Cost are included as
Constituents of the Index.
The CNX Nifty Junior Index represents about 11.33% of the free float market capitalization of the
stocks listed on NSE as on September 28, 2012.
CNX Nifty Junior is computed using market capitalisation weighted method, wherein the level of
the index reflects the total market value of all the stocks in the index relative to a particular base
period.
RETAIL RESEARCH
Daily traded volume in GS Junior BeES on NSE in the last 6 months:
MOSt Shares Midcap 100:
Year to date movement in Nifty and CNX Midcap (Rebased to 100):
MOSt Shares Midcap 100 is an open ended index ETF that seeks investment return that corresponds (before
fees and expenses) to the performance of CNX Midcap Index, subject to tracking error. The Scheme invests
in the securities which are constituents of CNX Midcap Index in the same proportion as in the Index.
The CNX Midcap Index comprises of 100 Midcap stocks whose weightage within the index is determined
based on their free float market capitalisation. The primary objective of the CNX Midcap Index is to capture
the movement and be a benchmark of the Midcap segment of the market.
YTD, the CNX Midcap Index posted 35%.
MOSt Shares Midcap 100 ETF may be a good choice for risk appetite investors who wish to invest in mid cap
stocks and to participate in the so called upcoming equity market rally. Investing through DIY SIP on every
month will further enable investors to rupee cost average of their investments considering the high volatile
nature in the domestic equity market.
Discount (+) / Premium (-) of Spot Price to NAV of MOSt Shares Midcap 100:
About CNX Midcap Index
•
The primary objective of the CNX Midcap Index is to capture the movement and be a benchmark
of the midcap segment of the market.
•
The CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000.
•
CNX Midcap is computed using free float market capitalization weighted method.
•
The CNX Midcap Index represents about 12.89% of the free float market capitalization of the
stocks listed on NSE as on March 31, 2014.
•
All constituents of the CNX Midcap Index must have a minimum listing record of 6 months.
Why invest in CNX Midcap Index:
•
Indian economy expected to grow at a fast pace.
•
Midcap companies are a leveraged play on India.
•
Midcap companies provide Growth and are Hidden Gems.
•
Midcap index complements large cap portfolios & provide better portfolio diversification.
RETAIL RESEARCH
Daily traded volume in MOSt Shares Midcap 100 on NSE in the last 6 months:
CPSE ETF:
Year to date movement in CPSE Index Vs. Nifty (Rebased to 100):
CPSE ETF is an open ended, semi diversified, thematic and passively managed mutual fund ETF which tracks
and provide returns corresponding to the CPSE Index, an index comprising of select heavyweight Central
Public Sector Companies listed at National Stock Exchange of India Ltd(NSE).
CPSE Index is constructed in order to facilitate Government of India’s initiative to disinvest some of its stake
in selected CPSEs. The index has base date of 01‐Jan‐2009 and base value of 1000.
Benefit of Investing in CPSE ETF:
•
•
•
Ability to participate in the long‐term development of India, by purchasing stocks in Infrastructure
and Natural Resources arena
Provides small retail and HNI investors with the ability to diversify exposure across a number of
Public Sector companies through a single instrument
Enables large investment in blue chip Public Sector enterprises without the constraint of market
liquidity on the underlying individual stock.
Discount (+) / Premium (-) of Spot Price to NAV of CPSE ETF:
The ETF has shown outperforming returns since its launch by gaining 55% between March 28 and June 25.
The fund has been trading with ample liquidity on both the BSE and the NSE with the daily average volume
of Rs. 12 crore since listed on NSE. PSU stocks are likely to do well going forward with the expected
economic recovery and their scope for expansion.
About CPSE Index:
CPSE Index is constructed in order to facilitate Government of India’s initiative to dis‐invest some of its
stake in selected CPSEs. The government opted for ETF route for disinvestment. The ETF shall track the
performance of the CPSE index.
Selection Criteria’s for the CPSE Index:
The 10 CPSE’s selected meet below mentioned parameters:
•
•
•
•
•
Included in the list of CPSEs published by the Department of Public Enterprise.
Listed at National Stock Exchange of India Ltd. (NSE).
Having more than 55% government holding (stake via Govt. of India or President of India) under
promoter category.
Companies having average free float market capitalization of more than 1000 Cr. for six month
period ending June 2013 are selected.
Have paid dividend of not less than four per cent including bonus for the seven years immediately
preceding or for at least seven out of the eight or nine years immediately preceding are
considered as eligible companies as on cut‐off date i.e. 28‐Jun‐2013.
RETAIL RESEARCH
Daily traded volume in CPSE ETF on NSE since launched:
GS Bank BeES:
Year to date movement in CNX Bank Index Vs. Nifty (Rebased to 100):
GS Bank BeES, was launched on May 2004, tracks CNX Bank Index as benchmark. CNX Bank Index which is a
free float market capitalization weighted index, comprises of 12 most liquid and large capitalised Indian
Banking stocks.
The investment objective of GS Bank BeES is to provide returns that, before expenses, closely correspond to
the total returns of securities as represented by CNX Bank Index.
Year to date, the GS CNX Bank ETF posted 34% while the daily average volume on NSE was at Rs. 54 lakh.
About CNX Bank Index:
CNX Bank Index is an index comprised of the most liquid and large capitalised Indian Banking stocks. It
provides investors and market intermediaries with a benchmark that captures the capital market
performance of Indian Banks.The index will have 12 stocks from the banking sector which trade on the
National Stock Exchange.
Discount (+) / Premium (-) of Spot Price to NAV of GS Bank BeES:
CNX Bank Index is computed using free float market capitalization method with base date of Jan 1, 2000
indexed to base value of 1000.
The CNX Bank Index represent about 15.34%of the free float market capitalization of the stocks listed on
NSE and 91.08% of the free float market capitalization of the stocks forming part of the Banking sector
universe as on March 31, 2014.
The total traded value for the last six months ending March 2014 of all the Index constituents is
approximately 17.34% of the traded value of all stocks on the NSE and 87.15% of the traded value of the
stocks forming part of the Banking sector universe.
Stock Selection Criteria:
Selection of the index set is based on the following criteria:
•
•
•
•
•
Company free float market capitalisation rank in the universe should be less than 500.
Company's turnover rank in the universe should be less than 500.
Company's trading frequency should be at least 90% in the last six months.
Company should have a positive networth.
A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the
normal eligibility criteria for the index for a 3 month period instead of a 6 month period.
RETAIL RESEARCH
Daily traded volume in GS Bank BeES on NSE in the last 6 months:
GS PSU Bank BeES:
Year to date movement in CNX PSU Bank Index Vs. Nifty (Rebased to 100):
GS PSU Bank BeES, was launched on Oct 2007, tracks CNX PSU Bank Index as benchmark. CNX PSU Bank
Index which is a free float market capitalization weighted index, comprises of 12 most liquid and large
capitalised Indian Public sector bank.
The investment objective of GS PSU Bank BeES is to provide returns that, before expenses, closely
correspond to the total returns of securities as represented by CNX PSU Bank Index.
Year to date, the GS CNX PSU Bank ETF posted 50% while the daily average volume on NSE was at Rs. 10
lakh.
CNX PSU Bank Index is computed using free float market capitalization weighted method with base date of
Jan 1, 2004 indexed to base value of 1000, wherein the level of the index reflects the total free float market
value of all the stocks in the index relative to a particular base period. The method also takes into account
constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without
affecting the index value.
Discount (+) / Premium (-) of Spot Price to NAV of GS PSU Bank BeES:
The CNX PSU Bank Index represents about 3.38% of the free float market capitalization of the stocks listed
on NSE and 93.00% of the free float market capitalization of the stocks forming part of the PSU Banks sector
Universe as on March 31, 2014.
The total traded value for the last six months ending March 2014 of all index constituents is approximately
7.40% of the traded value of all stocks on the NSE and 37.20% of the traded value of the stocks forming part
of the Banking sector universe.
Selection Criteria
Selection of the index set is based on the following criteria:
Daily traded volume in GS PSU Bank BeES on NSE in the last 6 months:
•
•
•
•
•
Constituent should be a Public sector bank
Constituent’s free float market capitalization rank in the universe should be among the top 500.
Constituent’s turnover rank in the universe should be in the top 500.
Constituent should have a positive Net worth.
The constituents should be available for trading in the derivatives segment (Stock Futures &
Options market) on NSE.
RETAIL RESEARCH
Index Comparison (as of 31 Mar 2014):
Particular
No. of Constituents
Nifty Index
CNX Mid‐cap Index
CNX Nifty Junior Index
CPSE Index
CNX Bank Index
CNX PSU Bank Index
50
100
50
10
12
12
P/E
18.86
14.3
17.28
10.99
14.31
8.8
P/B
3.23
1.95
2.31
2.02
2.24
0.98
Dividend Yield
1.37
1.65
1.45
3.35
1.4
3.02
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I T C Ltd
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BoB
Reliance Industries Ltd.
Divi's Laboratories Ltd
JSW Steel Ltd.
GAIL (India) Ltd.
SBI
Punjab National Bank
ICICI Bank Ltd.
Glenmark Pharmaceuticals Ltd.
Yes Bank Ltd.
REC Ltd
Axis Bank
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Motherson Sumi Systems Ltd.
Idea Cellular Ltd.
Container Corp
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IOC Ltd.
IndusInd Bank
Union Bank of India
Oriental Bank of Com
TCS Ltd.
Apollo Hospitals
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PFC Ltd
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Larsen & Toubro Ltd.
Container Corp
Godrej Consumer Products
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Yes Bank
IDBI Bank Ltd.
Tata Motors Ltd.
Siemens Ltd.
Adani Enterprises Ltd.
Engineers India Ltd.
Punjab National Bank
Allahabad Bank
State Bank of India
M & M Financial Services Ltd.
Bosch Ltd.
Bharat Electronics Ltd
Federal Bank Ltd.
Syndicate Bank
Financial Services
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IT
Pharma
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Industrial Manufacturing
Analyst: Dhuraivel Gunasekaran ([email protected])
RETAIL RESEARCH Fax: (022) 3075 3435
Corporate Office: HDFC Securities Limited, I Think Techno Campus, Building –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com
Disclaimer: Mutual Funds investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made
available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to
time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non‐Institutional Clients.
RETAIL RESEARCH