After a lull, HDFC Mutual Fund has fired a fresh salvo at the smart-beta investment arena, with the launch of three new exchange traded funds. HDFC Nifty 100 Quality 30 ETF, HDFC Nifty 50 Value 20 ETF and HDFC Nifty Growth Sectors 15 ETF are being rolled out by the house. The NFOs open from September 9 to September 20.
So far, the company had toyed with equal-weight based Nifty 50 and Nifty 100 products launched within the last one year. Factor based investing globally has picked up pace, with factor ETFs managing about $1.6-trillion assets compared to a puny $178 billion 10 years ago. Domestically, fund-houses such as IDFC, Motilal Oswal, Nippon, ABSL, DSP, UTI and Kotak have launched factor based ETFs and index funds in the past few months.
Will HDFC MF's new offerings make a difference to the existing landscape?
HDFC Nifty 100 Quality 30 ETF
This will be an open ended scheme tracking the Nifty 100 Quality 30 Index (TRI).
The quality factor index consists of 30 companies which are selected based on low gearing, high return on equity and profit growth. Stocks are selected based on quality score which is calculated on the basis of return on equity (ROE), debt-equity ratio (D/E) and average change in EPS. The quality index will be reviewed semi-annually.
HDFC Nifty 100 Quality 30 ETF will compete with existing 'quality' factor based products such as SBI Nifty 200 Quality 30 ETF, Edelweiss Nifty 100 Quality 30 Index Fund and ABSL Nifty 200 Quality 30 ETF (launched about a month ago). Funds use largecap indices such as Nifty 100 or Nifty 200 to select the 30 stocks for their portfolio. There are other products, such as Motilal Oswal S&P BSE Quality ETF, Motilal Oswal S&P BSE Quality Index Fund, DSP Nifty Midcap 150 Quality 50 Index Fund and UTI Nifty Midcap 150 Quality 50 Index Fund, which use a variety of other indices as underlying.
Let us see how the existing offerings have performed (see table below).
Currently, the Nifty 100 Quality 30 TRI has accorded considerable weights to FMCG and IT sectors, followed by Automobiles, Consumer Durables and Financial Services. In terms of stocks, the current portfolio is dominated by Asian Paints, Hindustan Unilever, ITC, Nestle India, HDFC Bank, Infosys, TCS, HCL Technologies, Bajaj Finance and Maruti Suzuki India.
Why quality stocks: There is some evidence that quality stocks show relative outperformance during the broader market weakness and this has been observed historically. The lower downside capture helps a portfolio of quality stocks, therefore, show higher long-term returns than the NIFTY 100 TRI. Do note that Quality has underperformed in FY17, FY19, FY 21 and FY22. It has outperformed Nifty 100 TRI roughly 50 per cent of time, which doesn’t strengthen its historical case.
HDFC Nifty 50 Value 20 ETF
This will be an open ended scheme replicating Nifty Value 20 Index (TRI).
The Nifty 50 Value 20 Index is designed to reflect the behaviour and performance of a diversified portfolio of value companies forming a part of Nifty 50 index. This index consists of 20 companies which are selected on the basis of Return on Capital Employed (ROCE), Price-Earnings (PE), Price to Book Value (PB) and Dividend yield (DY).
The underlying theme is to buy undervalued stocks. With a set basket, the ETF will aim to track the underlying index. HDFC Nifty 50 Value 20 ETF will compete with the likes of ICICI Pru Nifty 50 Value 20 ETF, Kotak Nifty 50 Value 20 ETF, Nippon India Nifty 50 Value 20 ETF and Nippon India Nifty 50 Value 20 Index Fund. These are among the existing 'value factor' based products with a long track record.
Let us see how the existing offerings have performed (see table below).
At the moment, the Nifty 50 Value 20 TRI has IT and FMCG sectors as main holdings, followed by Construction, Power, Oil & Gas, and Autos. In terms of stocks, the current portfolio is dominated by Infosys, TCS, ITC, HUL, L&T, HCL Tech, Powergrid, NTPC, Tech Mahindra and Wipro.
Why value stocks: Historical data shows that value stocks clock higher long-term returns than the NIFTY 50 TRI. But, do note that value and growth stocks do not perform at the same time. Often, it can take value stocks years to get the valuation/price that they deserve because the stock market is looking elsewhere. The Nifty 50 Value 20 is a compact portfolio of stocks and has so far shown good performance across time, except FY15 and FY23 year to date. In terms of financial year outperformance, it has a 85 per cent success against Nifty 100 or 50 TRI in last 13 years. However, just relying on 'value factor' offerings to help you navigate the markets will not be an optimal decision. One should combine value and growth factors in their overall portfolio to get the best of both worlds as well as diversify. Do note that Quality has underperformed in FY17, FY19, FY 21 and FY22. It has outperformed Nifty 100 TRI roughly 50 per cent of time, which doesn’t strengthen its historical case.
HDFC Nifty Growth Sectors 15 ETF
This unique ETF will be an open-ended scheme tracking Nifty Growth Sectors 15 Index (TRI).
Unlike value, quality or momentum factors, there are very few pure-play growth indices in India. The Nifty Growth Sectors 15 Index is designed to provide investors exposure to the liquid stocks from sectors of market interest. It comprises of 15 companies listed on NSE and on which, stock derivatives are available.
For those curious, how the 'growth' factor is segregated in the basket: Sectors are first selected based on P/E and P/B values of Nifty sectoral indices, which are compared to 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 capitalisation.
Let us see how Growth Sectors 15 index has fared against the others.
Compared to the HDFC MF offerings of Quality and Value, this offering is even more concentrated i.e. 15 stocks and 3 sectors (FMCG, Auto and auto components, & healthcare) only at present. These features elevate the risk for holding such a product in silo and hence investors must consider owning this type of offering only as part of a larger portfolio.
In terms of stocks, its current portfolio is dominated by ITC, HUL, M&M, Maruti Suzuki India, Sun Pharmaceutical Industries, Nestle India, Cipla, Bajaj Auto, Dr. Reddy's Laboratories and Eicher Motors.
Why growth stocks: Growth investing emphasises on companies which are projecting higher growth rates. These companies tend to perform and showcase growth irrespective of the market conditions. They perform even when other companies are impacted by market conditions. However, growth investing is deeply linked to overall economic growth rates. Do note that growth stock baskets are expensive compared to others, because investors willingly pay a premium. For instance, the index level price to earnings of Nifty Growth Sectors 15 is 35.6 times compared to 29.6 times of Nifty 100 Quality 30 or 17.4 times for Nifty 50 Value 20. During PE compression phases, growth stocks can see deeper declines.
What should investors do?
Investors should keep a close watch on how the premium/discount of the NAV plays out once these three new ETFs list on the exchanges. If market-making is done properly, ETF pricing for investors would be optimal.
If you are considering adding the new ETFs to your existing portfolio, look for overlaps. For instance, there is no point in adding more of largecaps to your already largecap-heavy portfolio.
Also, in the name of diversification, adding new products to your portfolio that expose you to the entire market, may not allow you outperform. For a seasoned investor, these may be a good additions to the satellite portion of a diversified portfolio. .