Review: Bharat-22 ETF is for investors with equity exposure

CPSE-ETF’s returns were good because of a single reason: This energy-heavy index (60% in energy stocks) was able to perform as the sector was doing well
The retail investor’s experience with central public sector enterprises’ exchange-traded fund (CPSE-ETF) hasn’t been too bad. Except for a blip in the calendar year 2015, when the fund’s net asset value fell 14 per cent, returns in 2014 and 2016 were 29 per cent and 18 per cent, respectively — substantially higher than the BSE Sensex’s returns of 23 per cent and 1.9 per cent for the corresponding periods. The going was reasonably good even in 2017, with return of 7.8 per cent till August 4. And there was a 5 per cent discount in the new fund offer and follow-on offers for retail investors.

But, returns were good because of a single reason: This energy-heavy index (60 per cent in energy stocks) was able to perform as the sector was doing well. “It is a thematic fund. So, investors betting on the sector would have been able to make good returns,” said a fund manager. With the rally being more broad-based in 2017, returns from the Sensex surged 21.4 per cent till August 4.

The government’s latest exchange-traded fund (ETF), Bharat-22, is different. It resembles a broader index, like the Sensex, more closely. Besides stocks being increased from 10 to 22, it is more diversified in terms of sectors. While the CPSE ETF was energy-heavy, Bharat-22 has capped sectoral exposure to 20 per cent and stock exposure to 15 per cent. 

“There is balance between earnings growth and stability. This will ensure investors are neither too disappointed, nor is there high volatility in the index,” said an investment manager closely linked with the structuring of the ETF. 

The ETF will also attract global pension funds, which are comfortable with average but safe returns.

Fund managers are happy with the mix. A chief investment officer of a leading fund house said: “All government-owned companies are in sensitive sectors such as industrials, finance and utilities. With the economy expected to do better in the coming quarters, these companies should do well. And that will give good returns.”

Fund managers have already purchased some of these stocks, especially State Bank of India, Hindustan Petroleum Corporation and Bharat Petroleum Corporation, said Kaustabh Belapurkar, head-research, Morningstar. This would not be a purely diversified or thematic fund because it does not represent many sectors in which the government does not have stakes. “It would also be interesting to see whether there is a discount for retail investors,” he said.

Some investors might be worried that even before the launch, stocks such as L&T at 17.1 per cent and ITC at 15.6 per cent have already breached the cap set by the ETF. And, what if the stock prices rise sharply before the launch and tilt the index in favour of single stocks or sectors? 

Mutual fund sectoral sources pointed out the index was formed in March, when these stocks were within the 15 per cent cap. Since then, these stocks have risen sharply, leading to this breach of cap. If stock prices of these two companies were to go up further, re-balancing might happen before the launch. Otherwise, it would happen in March 2018. 

Investors should take keen interest in this part because if re-balancing does happen before the launch in September-October, the annual re-balancing would happen every year at the same time. Of course, if the fund books a profit to reduce weight of a particular stock, there could be a chance it could go up and cause some loss to investors. 

“This is a good move in terms of maintaining ETF discipline because that way any particular stock will not be overweight,” added Belapurkar. 

On the whole, investment advisors said this was a good option for the moderate investor, one who has put 50 per cent of his money in equities and can live with volatility of 15-20 per cent. For new investors or conservative ones, a purely diversified fund or broader index-based ETFs would still be the best option.