Advancements in Information Technology (IT) have seen a boost since the COVID crisis, but selecting IT stocks remains a challenge, making active fund management difficult. Keeping this in mind, ICICI Prudential Mutual Fund has launched an open-ended Exchange Traded Fund – ICICI Prudential IT ETF.

The fund house is of the view (as mentioned in its presentation) that IT industry is poised to grow considering the advancements happening in the Information technology world. Given below are some of the factors that will drive the growth.

Image 1: Factors aiding Technology

(Source: ICICI Prudential IT ETF presentation)

Considering the current pandemic driven prolonged subdued growth, the fund house believes that those who want to be a part of the digital transformation without having to decode the complexities in the IT sector all by yourself can consider investing in ICICI Prudential IT ETF to create wealth over the long term.

The index provides exposure to a portfolio of 10 stocks from IT industry, mainly that are a part of NIFTY.

ICICI Prudential IT ETF is a passively managed fund, the subscription/redemption of units work on the concept of exchange with underlying securities. ICICI Prudential IT 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.

However, ICICI Prudential IT ETF has a high exposure to equity and is restricted to 30 stocks. 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 to gain from IT investment. One should have an investment time horizon of 5 years or more.

Table 1: Details of ICICI Prudential IT ETF

Type An open-ended Index Exchange Traded Fund tracking Nifty IT Index Category Exchange Traded Fund
Investment Objective To provide returns before expenses that closely correspond to the total return of the underlying index subject to tracking errors.
However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans Nil Options Nil
Entry Load Not Applicable Exit Load Not Applicable
Fund Manager Mr Kayzad Eghlim Benchmark Index NIFTY IT TRI.
Issue Opens August 12, 2020 Issue Closes: August 17, 2020

(Source: Scheme Information Document)

How will ICICI Prudential IT ETF allocate its assets?

The asset allocation pattern of the scheme would be as follows:

Table 2:  ICICI Prudential IT ETF’s Asset Allocation

Instruments Indicative Allocation (% to net assets) Risk Profile
Maximum Minimum High/Medium/Low
Equity and Equity related securities of companies constituting the underlying index (NIFTY IT Index) 100 95 Medium to High
Units of debt schemes, TREPs# , Repo and Reverse Repo, cash & cash equivalents. 5 0 Low to Medium
Units of debt ETFs 5 0 Low to Medium

#Or similar instruments as may be permitted by SEBI/RBI from time to time.
(Source: Scheme Information Document)

What will the Investment Strategy be?

The corpus of the ICICI Prudential IT ETF will be invested predominantly in stocks constituting the underlying index in the same proportion as in the Index and endeavour to track the benchmark index.

A very small portion (0-5% of the net assets) of the fund may be kept liquid to meet the liquidity and expense requirements. The fund may also use various derivatives and hedging instruments from time to time, as would be available and permitted by SEBI, in an attempt to protect the value of the portfolio and enhance unitholders’ interest.

The performance of the ICICI Prudential IT ETF may not be commensurate with the performance of the underlying index on any given day or over any given period. Such variations are commonly referred to as the tracking error. The fund intends to maintain a low tracking error by closely aligning the portfolio in line with the index.

The stocks comprising the underlying index are periodically reviewed by Index Service Provider. A particular stock may be dropped or new securities may be included as a constituent of the index. In such an event, the fund will endeavour to reallocate its portfolio, but the available investment/ disinvestment opportunities may not permit precise mirroring of the underlying index immediately.

Similarly, in the event of a constituent stock being demerged, merged, or delisted from the exchange or due to a major corporate action in a constituent stock, the fund may have to reallocate the portfolio and seek to minimize the variation from the index. In such events, it may be more prudent for the fund to take exposure through derivatives of the index itself or its constituent stocks in order to minimize the long term tracking error.

About the Index

In order to have a good benchmark of the Indian IT sector, NSE Indices developed the Nifty IT sector index. Nifty IT provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market.

Companies in this index are those that have more than 50% of their turnover from IT related activities like IT Infrastructure, IT Education and Software, Telecommunication Services and Networking Infrastructure, Software Development, Hardware Manufacturer’s, Vending, Support and Maintenance.

The NIFTY IT Index comprises of 10 companies listed on the National Stock Exchange (NSE). The NIFTY IT index is computed using free float market capitalization method with a base date of Jan 1, 1996 indexed to a base value 100.

The stocks to be included on NIFTY IT Index is based on NSE’s eligibility criteria and the Index is re-balanced on a semi-annual basis. The cut-off date is January 31 and July 31 of each year.

Image 2: The 10 constituents of the Index by weight

Data as on July 31, 2020
(Source: NIFTY IT Index)

Creation of Units

Fund manager and his team under normal circumstances will endeavour that the tracking error of the Scheme does not exceed 2% per annum. The fund manager will create units and offer it for subscription as the Scheme will be listed on Stock exchanges, so that the investors can directly buy/sell in blocks from the Fund in ‘Creation Unit’ Size.

‘Creation Unit’ is a fixed number of Units of the Scheme, which is exchanged for a predefined basket of shares underlying the index called the “Portfolio Deposit” and a “Cash Component”. The facility of creating / redeeming units in Creation Unit size is available to the Authorised Participant and Investors.

The number of units, that investors can create / redeem in exchange of the Portfolio Deposit and Cash Component, is 5,000 Units and in multiples thereof.

Who will manage ICICI Prudential IT ETF?

ICICI Prudential IT ETF will be managed by Mr Kayzad Eghlim.

Mr Kayzad has a B.Com, M.Com, as well as a Masters in Business Administration degree to his credit. He has been associated with ICICI Pru AMC since 2008. Prior to that, he has been associated with IDFC Investment Advisors Ltd, Prime Securities, and Canbank Mutual Fund.

Some of the other schemes Mr Enghlim has managed in the past are ICICI Prudential Nifty Index FundICICI Prudential Nifty Next 50 Index FundICICI Prudential Sensex ETFICICI Prudential Equity- Arbitrage Fund – Equity Portion, ICICI Prudential Nifty ETFICICI Prudential Nifty 100 ETF, and ICICI Prudential NV20 ETFICICI Prudential Midcap Select ETFICICI Prudential Equity Savings FundBHARAT 22 ETFICICI Prudential Sensex Index FundICICI Prudential Nifty Next 50 ETFICICI Prudential Midcap Select ETFICICI Prudential S&P BSE 500 ETFICICI Prudential Nifty Next 50 ETF, and ICICI Prudential Midcap 150 ETF.

The outlook for ICICI Prudential IT ETF:

In an endeavour to achieve the stated objective of the scheme, the fund manager will track/replicate the underlying index. Since ICICI Prudential tracks Nifty IT index, active management is not involved and it will invest in 10 IT stocks only as per the index.

But in current environment of global economic slowdown, Exchange Traded Funds have gained some traction because stock picking has been difficult given the extreme volatility and uncertainty in the Equity markets. Most of the IT companies listed on Nifty IT Index have a global presence making them established players of the industry. Technology has become and is going to be integral part of the new normal world for most necessities.

The fund house is of the view that ICICI Prudential IT ETF provides investors an opportunity to invest in this dynamic and fast-paced sector. 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 ICICI Prudential IT ETF will rely solely on the performance of the underlying index.

Table 3: Performance of the underlying index

Index Name Absolute CAGR
3 Months 6 Months 9 Months 1 Year 3 Years 5 Years
NIFTY 100 – TRI 20.45 -6.16 -3.61 5.02 5.78 7.54
NIFTY 50 – TRI 20.94 -6.48 -3.81 4.53 6.47 7.56
NIFTY IT – TRI 32.50 9.90 20.40 20.15 21.73 10.86

Data as on August 14, 2020
(Source: ACE: MF; PersonalFn Research)

This article first appeared on PersonalFN here

Leave a Reply

Your email address will not be published. Required fields are marked *