Should you invest in Mirae Asset S&P 500 Top 50 ETF?

Mirae Asset Investment Managers (India) has announced the launch of Mirae Asset S&P 500 Top 50 ETF and Mirae Asset S&P 500 Top 50 ETF Fund of Fund (FoF). These are India’s first passive products that will invest in the 50 mega-cap companies of the US by mimicking the S&P 500 Top 50 index composition. The NFO period for the ETF will close on September 14 while that for the FoF will close on September 15. Units will be allotted by September 22. Before considering investing in these new funds, here are some key things to understand.

Know the index

If you follow US stocks, you may have heard about the S&P 500, which is regarded as the single best gauge of large-cap US stocks as it is a market cap weighted index that includes 500 companies that cover 80 per cent of available market capitalisation of the listed unverse in the US. The S&P 500 Top 50 index consists of the 50 largest companies in terms of float-adjusted market capitalisation from the S&P 500, a gauge of large-cap US stocks. The constituent with the smallest market cap in this index is around $145 billion (Citigroup Inc), compared to just four stocks in the $100-billion mcap-club in India. Essentially, the S&P 500 Top 50 index is a curated way to play US mega-cap stocks in a single basket. The index was launched in November 30, 2015, which gives it a live tenure of about six years. Mirae’s ETF and FoF will be benchmarked to the S&P 500 Top 50 Index Total Return Index (INR) variant.

In terms of sector representation, the S&P 500 Top 50 has 39 per cent weight in IT, Communication Services (19 per cent), 12-13 per cent each in Consumer Discretionary and Healthcare sectors, Financials (8 per cent), Consumer Staples (6.5 per cent) and the rest in Energy & Industrials. In terms of current stock allocation, the top 10 stocks are Apple, Microsoft, Amazon, Facebook A shares, Alphabet (A & C shares), Tesla, Nvidia, Berkshire and JP Morgan Chase, and all these account for 52 per cent of portfolio weight.

On the face of it, the S&P 500 Top 50 index does not appear to be excessively diversified as the S&P 500 (basis for a Motilal Oswal index fund), nor is it too concentrated as the Nasdaq 100 index (Motilal Oswal and Kotak have products based on it) and the NYSE FANG+ index (Mirae has an ETF and a FoF based on it). So, as an index it seems an ideal choice for investors who neither want excessive exposure to highly-valued US tech sector nor a US stock basket that is too thinly spread. From a price to earnings (PE) valuation perspective, S&P 500 Top 50's trailing PE at 28 times is 10 per cent cheaper than S&P 500's 31 times.

Comparing S&P 500 Top 50 (USD) with S&P 500 (USD) on total returns, we find that the former does well in terms of annualised risk-adjusted returns for three, five-year periods ended August 31, 2021. Except for 2016, S&P 500 Top 50 (USD) has beaten S&P 500, with alpha being over 100 basis points (bps) in 2017, 2018 and 2019.

The outperformance (over 600 bps) was much more pronounced in 2020, perhaps due to Covid meltdown and ensuing recovery, but that has normalised again in 2021 year to date period. During the Covid-induced market meltdown during February-March 2020, the Top 50 index fell lower than S&P 500. Of course, it remains to be seen how the Top 50 index performs over longer periods.

US investing route

As a mutual fund investor, there are over a dozen schemes, including Mirae’s two new products, to get pure-play exposure to US stocks. ETFs can prove quite useful to those investors who demand exposure to a specific industry, asset class, region, etc. at a reasonable cost.

Unlike an actively managed fund where the choice of stock selection and portfolio management is paramount, the ETF and FoF route is a solution for investors who like a rule-based approach for portfolio creation. The FoF offers SIP facility but at a higher TER. Watch out for ETF market price and NAV differences in case you plan to use ETFs as a tactical tool for quick entry and exit of invesments on the stock exchange platform.

Motilal Oswal NASDAQ 100 ETF (launched in 2011), Franklin Feeder Franklin US Opp (2012) and ICICI Pru US Bluechip (2012) are the oldest, but more than half of the US fund options have been launched in last three years amid the bull-run. Hence, investors must wait and watch how the new ETFs and their FoFs perform in a sustained manner.

Investing in US-listed mega-caps can give exposure to a relatively more stable portfolio of companies with lower risk and having advantages of scale, strong brand reputation and deep economic moats.

The sectoral agnostic nature of Mirae Asset S&P 500 Top 50 ETF & FoF means that volatility and risk should ideally be lower than tech sector-focussed US fund options. Do note that from a taxation perspective, both the ETF and the FoF will be taxed as debt products.

In general, passives offer a low-cost investing alternative. Existing US-focussed ETFs have total expense ratio (TER) of 40-60 bps compared to some US-focussed Indian mutual funds, which have TERs of up to 2.5 per cent. If you go through the direct plan route, you can save 40-100 bps compared to regular plans. Thus, Mirae Asset S&P 500 Top 50 ETF and its FoF are expected to offer low-cost US mega-cap investing.

Apart from geographical diversification, many domestic investors often look at US investing as a venue to benefit from dollar appreciation. Though the Indian rupee has historically depreciated against US dollar over long-term and thus added extra sparkle to investor return, as/if and when INR appreciates the value of foreign asset will decrease.

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