Mutual Funds

Own some US bluechips

K. Venkatasubramanian | Updated on March 19, 2011

With the Indian mutual fund industry beginning to experiment with new products, Motilal Oswal too has launched a US-based exchange traded fund (ETF) — a first of its kind in India. Called the MOSt Shares Nasdaq 100 ETF, the fund is based on the technology-heavy Nasdaq 100 index in the US. Benchmark Mutual had launched an ETF based on the Hang Seng index sometime ago.

MOSt Shares Nasdaq 100, as the name suggests, would be an open-end fund investing in the shares of Nasdaq 100. The sectors that constitute the Nasdaq 100 are mainly software, hardware, semiconductors and pharmaceuticals (which together account for more than three-fourths index weight). To a lesser extent, retail, media and a few other sectors too figure in the index.

New opportunities

For Indian investors, the MOSt Shares Nasdaq 100 ETF allows exposure to global technology players such as Apple, Google, Intel, Microsoft, Cisco, eBay, Qualcomm, Yahoo!

There are several advantages to the technology space in the US in general, especially when considering that its core sectors are still in recovery mode.

Companies such as Apple and Google have had spectacular sales growth even during the period of heavy financial crisis starting from late 2007 to 2009.

Nasdaq 100 companies on an average derive around 39 per cent of their revenues from outside the Americas, which makes for a sound geographic-mix. Many of these companies are leaders in their segment of operation, be it operating systems, technology products or chip manufacturing.

What is more relevant from an investor standpoint is that even though the index may seem technology heavy, the definition is broad and these companies cater to very different segments with limited or no overlaps. Indeed, from online shopping companies to router manufacturers to smartphone and laptop producers to software product firms, the list encompasses segments an Indian investor simply does not get an opportunity to invest in domestically.

In India, there are three-four technology mutual funds, but most of them rarely invest in stocks outside the top four-five software companies and one or two telecom companies and have generally been underperformers vis-à-vis the broader markets.

Returns and valuations

The Nasdaq has delivered over 15 per cent returns over the last one year. The index normally does well in blocks of three-five years and then goes into a lull. From 1999 to 2002, the Nasdaq had a near exponential rally, while post the dotcom bust it cracked to lower levels and underperformed broad markets there. But from 2008, the index has once again bounced back and companies such as Apple have led an outperforming rally.

Data from Bloomberg shows that the index is now trading at a little over 18 times trailing earnings and has been estimated to trade at just over 14 times one-year forward earnings, suggesting robust index constituents' earnings growth. Indeed, even the PEG multiple at 0.77 appears attractive. All these are at substantial discount to what domestic software companies trade at.

Low to debt-free companies and robust cash flows are other positives. With a revival in technology spends, even the hitherto underperforming sectors such as telecom equipment manufacturers and semiconductor companies are set to benefit from an upward capex cycle. Given the improving outlook on the US economy, thanks to pick-up in key macro indicators there, investors may look at this option as a diversifier.

Investors need to note that the MOSt Shares Nasdaq 100 is treated as a debt fund and would thus be taxed accordingly.

Published on March 19, 2011

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