In the current volatile environment, it is getting difficult to choose worthy stocks actively and most of the actively managed schemes were underperforming. So the spotlight is on passively managed funds now, especially ETFs.
ETFs are innovative products that provide exposure to an index or a basket of securities or physical gold that trade on the exchange like a single stock. ETFs have a number of advantages over traditional open-ended index funds because they can be bought and sold on the exchange at prices that are usually close to the actual intra-day NAV of the Scheme.
HDFC Mutual Fund has launched HDFC Banking ETF, an open-ended scheme that will be tracking the NIFTY Bank Index. It is of the view that Banking sector plays a very important role for growth of any economy and with support from the government reforms on development, this sector offers a potential advantage.
It is a passively managed fund, the subscription/ redemption of units work on the concept of exchange with underlying securities. HDFC Banking ETF has all the benefits of indexing such as diversification, low cost, and transparency. As ETFs are listed on the exchange, costs of distribution are much lower and the reach is wider.
NIFTY Bank Index forms the representation of Indian Banking Sector with 12 most liquid stocks of banking sector, comprising both private and PSU banks from Largecap and Midcap companies. So, by tracking/replicating such an index will help the investors to invest only in companies forming the index in the same proportion as the underlying index for good gains. Besides it does provide good hedging options for all the stocks, forming part of NIFTY Bank Index, that are available in F&O segment of the market as well.
However, HDFC Banking ETF has a high exposure to equity and is restricted to 12 stocks only. It can be considered a high risk-return investment proposition. The fund is suitable for aggressive investors who are looking for a passively managed fund focusing on a mix of large cap and mid cap banking stocks. One should have an investment time horizon of 5 years or more.
Table 1: Details of HDFC Banking ETF
|An open-ended Scheme replicating/tracking NIFTY Bank Index
|Exchange Traded Fund
|To provide investment returns that, before expenses, closely correspond to the total returns of the Securities as represented by the NIFTY Bank Index subject to tracking errors.
There is no assurance that the investment objective of the Scheme will be realized.
|Rs 5,000 and in multiples of Re 1 thereafter
|1/100th of the value of NIFTY Bank Index on the date of allotment of units.
|Mr Krishan Kumar Daga
|NIFTY Bank Index (Total Returns Index)
|August 10, 2020
|August 14, 2020
(Source: Scheme Information Document)
How will HDFC Banking ETF allocate its assets?
The asset allocation pattern of the scheme would be as follows:
Table 2: HDFC Banking ETF’s Asset Allocation
|Minimum Allocation (% of total Assets) *
|Maximum Allocation (% of total Assets) *
|Securities covered by NIFTY Bank Index
|Medium to High
|Debt Securities & Money Market Instruments
|Low to Medium
*The above limits shall not apply to Subscription and Redemption Cash Flow. Subscription cash flow is the subscription money received for deployment and redemption cash flow is the money kept aside for meeting redemptions.
(Source: Scheme Information Document)
What will the Investment Strategy be?
HDFC Banking ETF would invest in stocks comprising the underlying index and endeavour to track the benchmark index. The Fund may also invest in debt & money market instruments, in compliance with regulations to meet liquidity and expense requirements.
HDFC Banking ETF endeavours to invest in stocks forming part of the underlying index in the same ratio as per the index to the extent possible and to that extent follows a passive investment strategy, except to the extent of meeting liquidity and expense requirements.
Since the Scheme is an exchange-traded fund, it will only invest in securities constituting the underlying index. However, due to corporate action in companies comprising the index, the Scheme may be allocated/allotted securities which are not part of the index. Such holdings would be rebalanced within 7 Business Days from the date of allotment/listing of such securities.
As part of the Fund Management process, the Scheme may use derivative instruments such as index futures and options, or any other derivative instruments that are permissible or may be permissible in the future under applicable regulations. However, trading in derivatives by the Scheme shall be for restricted purposes as permitted by the regulations.
A brief of the Index
Nifty Bank Index is an index comprising the most liquid and large capitalised Indian Banking stocks, the index captures the capital market performance of Indian Banks. The index has 12 stocks from the banking sector which trade on the National Stock Exchange.
Image: Weights of bank holdings in the Index
(Source: NIFTY Bank Index)
Stock Selection Criteria in Index
- Companies ranked within top 800 based on both average daily turnover and average daily full market capitalisation based on previous six months’ period data
- Companies should form part of respective sector universe.
- The company’s trading frequency should be at least 90% in the last six months.
- The company should have a listing history of 6 months. A company which comes out with an IPO will be eligible for inclusion in the index, if it fulfils the normal eligibility criteria for the index for a 3-month period instead of a 6-month period.
- In case of NIFTY Bank index, companies that are allowed to trade in F&O segment at NSE are only eligible to be a constituent of the index.
Constituent Capping: Weights of each stock in the index will be calculated based on its free-float market capitalization such that no single stock shall be more than 34% and weights of top 3 stocks cumulatively shall not be more than 63% at the time of rebalancing. The review will take place on a semi-annual basis. Further, on a quarterly basis index will be screened for compliance.
Creation of Units
The fund manager along with his team would create investment units so investors can invest in the fund directly through the stock exchange in form of ‘Creation Unit Size’.
It is fixed number of units of the Scheme, which is exchanged for (a) a basket of securities (Portfolio Deposit) and a Cash Component; or (b) cash for purchasing basket of securities and a Cash Component, equal to the value of said predefined units of the Scheme.
Each Creation Unit size consists of 12,500 units of the ETF. Each unit of the ETF will be approximately equal to the 1/100th value of the NIFTY Bank Index. ‘Portfolio Deposit’ consists of a pre-defined basket of securities that represent the underlying index as announced by AMC from time to time.
The Scheme aims to track the NIFTY Bank Index as closely as possible before expenses. The index will be tracked on a regular basis; changes to the constituents or their weights, if any, will be replicated in the underlying portfolio with the purpose of minimizing tracking errors. ETF, a passive investment, carries lower risk as compared to active fund management.
The portfolio would follow the index; therefore, the level of stock concentration in the portfolio and its volatility would be the same as that of the index, subject to tracking errors. Thus, there would be no additional element of volatility or stock concentration on account of fund manager decisions.
Who will manage HDFC Banking ETF?
HDFC Banking ETF will be managed by Mr Krishan Kumar Daga.
Mr Krishan Kumar Daga is a Commerce graduate and collectively has over 24 years of experience in Fund Management and Research. Before joining HDFC Asset Management Company Limited in September 2015, Mr Daga worked as a Fund Manager / Head – ETF at Reliance Capital Asset Management Company Limited for 5.5 years, as a Vice President at Reliance Capital Ltd for 6 months and for a year at Deutsche Equities as a Vice President.
Currently at the HDFC AMC, some schemes that Mr Daga manages include HDFC Arbitrage Fund, HDFC Equity Savings Fund (Arbitrage Assets), HDFC Gold ETF, HDFC Gold Fund (FOF), HDFC Index Fund – NIFTY 50 Plan, HDFC Index Fund – SENSEX Plan, HDFC Multi-Asset Fund (Gold and Arbitrage Assets), HDFC NIFTY 50 ETF, and HDFC SENSEX ETF.
The outlook for HDFC Banking ETF:
In order to achieve the stated objective of the scheme to generate wealth the fund manager will only mirror the underlying index of 12 stocks without any analysis. Since the underlying index is a banking index, there is a pressure on the banking sector due to the pandemic effect. Most of the banks are to witness a steep rise in non-performing assets and increase in number of unpaid loans.
Since HDFC Banking ETF’s structure is such that it will protect long-term Investors from inflows and outflows of short-term Investor. This is because the Fund does not bear extra transaction cost when buying/selling due to frequent subscriptions and redemptions. These savings in cost are passed on to the investors in the form of lower costs. Furthermore, exchange traded mechanism enables minimal collection, disbursement, and other processing charges.
But In India, ETFs are slowly catching up with the global trend of investing in mutual funds. With most of the actively managed funds having underperformed in the last few years, passively managed ETFs have become an alternate choice for investors. Fund houses are making an attempt to provide more options for investors to choose from.
Being passively managed, the fund manager will not conduct any analysis on the stocks and will only try to mirror the index. So, the performance of HDFC Banking ETF will rely solely on the performance of the 12 stocks.
Table 3: Performance of underlying Index
|Absolute returns (%)
|NIFTY 500 – TRI
|NIFTY BANK – TRI
Data as on August 11, 2020
(Source: ACE: MF; Personalfn Research)
This article first appeared on PersonalFN here