Mutual Funds

CPSE Exchange Traded Fund: Time to check out

Kumar Shankar Roy BL Research Bureau | Updated on March 30, 2021

With a confined theme of state-owned firms, the ETF’s performance has been sub-par

Investors can book profits in CPSE Exchange Traded Fund (ETF) on account of its sustained sub-par performance and high portfolio concentration. Given the recovery in markets over the past one year from the Covid lows, investors should take home any profit in CPSE ETF and reallocate the money into pure-play multi-cap funds.

Launched in March 2014 as a new fund offer (NFO), CPSE ETF subsequently saw six further fund offerings (FFO) between January 2017 and January 2020. Put together, around ₹66,500 crore was raised through the NFO and in the six FFOs.

But the wait for the CPSE ETF to perform has only grown longer. The NFO tranche and two of the FFOs (those launched in November 2018 and January 2020) are the only funds whose current NAV is higher than the respective listing-day NAVs.

 

With just 12 stocks in the Nifty CPSE index that the ETF mimics, this is an extremely concentrated portfolio and one of the narrowest stock baskets available among equity schemes. Plus, the ETF is a proxy of a confined theme — government-owned firms. We strongly believe such a play is better addressed in a diversified equity portfolio where state-owned firms are one among the many constituents.

The CPSE ETF, in the one-year ended February 26, 2021, has delivered 23.77 per cent gains, bolstered by the market upswing.

However, this is over 7 percentage points lower than the Nifty’s 31.37 per cent jump (CPSE ETF considers Nifty TRI as its additional benchmark).

Performance has been lacklustre in three years (down 7.94 per cent CAGR) and five years (up 5.09 per cent CAGR).

Since its launch in March 2014, CPSE ETF has delivered about savings-bank-account returns (4.26 per cent CAGR) compared with the 50-share bluechip Nifty that has more than doubled in value (13.24 per cent CAGR).

Private vs PSUs

Playing the ‘India Growth Story’ through investment in large PSU companies is a sub-optimal choice. Both the scope as well as the track record of wealth-creation is far better in the case of privately owned companies. Despite CPSE ETF offering exposures to Maharatna, Navaratna and Miniratna CPSEs, it is private-sector companies that have trumped government-owned firms across the spectrum.

The price-to-earnings (PE) ratio and dividend yields of the Nifty CPSE index has generally been cheaper and better, respectively, compared with a broader market index such as the Nifty 50. This is an attraction for these companies.

The very same factors, however, can be a reminder of how the markets could view the lacklustre potential of government-owned companies. The outperformance of the broader market shows that investors are willing to pay a premium for growth.

Given the government ownership comfort factor, CPSE stocks are said to deliver steady performance and possess the ability to contain losses in downturns. CPSE ETF’s basket belies those expectations, too. In the six full calendar years since its inception, the ETF has posted negative returns in as many as four, even though the broader market fell only in 2015.

As much as 88 per cent of CPSE ETF is in three sectors: power (42 per cent), oil (23.07 per cent) and minerals/mining (22.3 per cent).

The ETF bets over 80 per cent money on just five stocks — ONGC (20.76 per cent), Power Grid (19.68 per cent), NTPC (18.73 per cent), Coal India (16.35 per cent) and Bharat Electronics (8.39 per cent). This is not desirable — the performance of this 12-stock basket has not been able to prove otherwise.

Published on March 27, 2021

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