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Should you recommend CPSE ETF?

While the track record of CPSE ETF looks attractive will it be able to live up to its expectations?
Ravi Samalad Jan 5, 2017

Reliance Nippon Life AMC is expected to come out with a follow on public offer (FPO) of its CPSE ETF this month.

The CPSE ETF launched in March 2014 had collected Rs. 3,000 crore and this time the government has reportedly set a higher target of Rs. 4,000 - 6,000 crore for the FPO.  

To attract retail investors, the government had offered loyalty units in the ratio of 1:15.  The fund house is hoping that the government will extend the loyalty units offer to retails investors in this FPO too.

Reliance CPSE ETF tracks the Nifty CPSE index which comprises 10 central public sector enterprises - ONGC, Coal India, Indian Oil, GAIL (India), Oil India, Power Finance Corporation (PFC), Bharat Electronics, Rural Electrification Corporation (REC), Engineers India and Container Corporation of India.

How has the CPSE ETF performed? According to a ICRA note, the ETF has given annualised returns of 15.15% (non-retail category) as compared with 12.09% generated by Nifty 50 total return index (TRI) since inception. In the same time period, the retail investors received 17.96% CAGR after adjusting for loyalty units.

While the returns look attractive will the ETF be able to live up to its expectations going ahead? The note says that the stocks in CPSE ETF have lower P/E ratio and high dividend yields and are available at attractive valuations. “The performance of the ETF should get some benefit from the stable government at the centre. The government of India through its different ministries is continuously monitoring the performance of key PSU stocks and there is visible effort to achieve production and revenue targets. India is slowly and steadily coming out of the subsidy regime. Once it’s fully done the real value of these stocks will be unlocked,” says ICRA.

Given the past performance, distributors are enthused to recommend this FPO to their clients, says Himanshu Vyapak, Deputy CEO, Reliance Nippon Life AMC. “Brokers are excited because the performance of the previous issue has been good. The fund has outperformed Nifty in the last two years. The basket of this ETF which comprises energy, infrastructure, oil and finance sectors are government’s priority. Besides, the valuations of Nifty CPSE index looks attractive at this juncture,” says Vyapak.

Besides, since the ETF is RGESS compliant, Vyapak says that this is an added advantage for investors.  

However, being a thematic ETF it comes with its own set of risks. For instance, investors have to bear the concentration risk as the ETF comprises only 10 stocks. Out of these 10 stocks, ONGC has the maximum weightage (24.5%) in the NIFTY CPSE Index, followed by Coal India (20.63%) which is another energy company. “Around 70% of the index comprises of energy companies, which make the index a risky bet for retail customers,” cautions ICRA.  

Manoj Nagpal of Outlook Asia Capital is of the view that investors should first decide whether they wish to invest in the ETF based on their risk profile. According to him, investors who are willing to take risk can allocate 5% of their investments towards this fund. However, he cautions that government policies will drive the performance of this ETF. Further, he says that the ETF can witness higher bouts of volatility due to the thematic nature of the index. “It can be a cherry on the cake but can’t be the core part of the portfolio. The index will move in cycles. For instance, the CPSE ETF didn’t deliver for one year after listing when the market was going up. So investors need to look at the funds they are holding currently and decide whether an allocation is required,” says Nagpal.

 

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