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HDFC Mutual Fund has launched HDFC Nifty 100 Equal Weight Index Fund, whose NFO is open for subscription now. This fund is one of the few options that Indian investors have, to play the equal weight game on the Nifty 100 index. The other alternative is Sundaram Nifty 100 Equal Weight. In the equal weight products tracking Nifty 50, you do have ABSL Nifty 50 Equal Weight, DSP Equal Nifty 50 & ETF and HDFC NIFTY50 Equal Weight, but the Nifty 100 offers higher coverage of Indian listed space and exposure to sectors which are not covered in the Nifty 50.
An equal-weighted index is where an equal amount of money is invested in the stock of each company that makes up the index. Thus, the performance of each company's stock carries equal importance in determining the total value of the index.
Nifty 100 and Nifty 100 EW difference
The Nifty 100 index is a proxy for Indian large cap stocks space. The Nifty 100 index, and by extension index funds closely tracking it, will have larger companies (by market cap) having higher weights. They will tend to outperform during periods of polarisation.
In the Nifty 100 Equal Weight (EW) index, all companies will have equal weights. So, funds tracking the Nifty 100 EW will likely outperform in broad-based rallies. They remove momentum bias and largely bet on mean reversion within NIFTY 100 stocks.
The change in weights means that, for instance, top holdings of Nifty 100 such as RIL (9.2 per cent weight), Infosys (7.9 per cent), HDFC Bank (7.3 per cent) etc. will have 1 per cent weight in the Nifty 100 EW. Similarly, the bottom holdings of Nifty 100 such as PNB (0.12 per cent), Cadila Healthcare (0.14 per cent) and P&G Hygiene (0.16 per cent) will have 1 per cent weights each in Nifty 100 EW. The 1 per cent allocation will be same for all the 100 constitients.
Essentially, Nifty 100 and Nifty 100 EW indices have same stocks, but weight/allocation is different. Weights for Nifty 100 EW start at 1 per cent each rebalance day (first trading day of January, April, July & October of each year), but may temporarily move away from one due to price movements. Quarterly rebalancing will set it right.
From a sectoral composition, this changes the situation drastically. As on December 31, 2021, Nifty 100 had the highest allocations to Financial Servicex (33 per cent), IT (16.7 per cent), Consumer goods & services (13.2 per cent). In the Nifty 100 EW, Financial Services has 23.1 per cent weight, IT has 6 per cent and Consumer Goods 18.1 per cent. While Nifty 100 EW has lower weight in terms of allocation to top 3 sectors, it is overweight in Consumption, Metals, Automobiles, Pharmaceuticals, Cement and Power. (see chart below)
Who is winning?
For investors, performance counts. Who is the dominant performer among Nifty 100 and Nifty 100 EW?
Over the long-term, say 10 years or more, CAGR returns of th Nifty 100 EW is better by a margin of 20-80 basis points. But Nifty 100 plain-vanilla index wins lost ground in 3 and 5 year periods. While the equal weight strategy has outperformed overall, the winner keeps changing.
Take a look below at the FY performance of both the indices.
The positive return years since FY04 are at the same at 15 ocassions for both. Nifty 100 average FY return is 23 per cent, 400 bps lower than Nifty 100 EW. The latter also has a higher average negative return (20 per cent), 100 bps more than Nifty 100. The number of years witnessing out-performance over each other is close at 9 for Nifty 100 and 10 for Nifty 100 EW.
Each index outperforms the other in different market environments.
It can be seen that polarised markets favour market cap weighted indices, while broad-based markets see equal weight indices doing better.
More weight to the historical winner stocks exposes a portfolio to higher risks because stocks/sectors regularly go through rotation and when the largest market-cap stocks in a portfolio underperform, they have an outsized impact on the overall performance. In contrast, smart beta products based on equal weight indices offer an anti-momentum, forced buy-low-sell-high mode of investing that clearly comes with lower stock and sector concentration risks.
For risk-averse investors, equal weight index strategy is a suitable investment. Of course, these funds can witness higher turnover but impact costs may not be a concern given their large-cap portfolios.
The NFO closes February 18.
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