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Indian e-commerce pioneer Sachin Bansal's Navi Mutual Fund has unveiled Navi US Total Stock Market Fund of Fund, which will invest in Vanguard Total Stock Market ETF, one of the largest passively managed US-based ETFs.
With this brand new fund, Indian investors can get exposure to an exchange traded fund (ETF) from The Vanguard Group, which revolutionised index investing thanks to founder John Bogle's efforts. The NFO will close on February 18. Apart from the Vanguard factor, the fund has gained attention for claiming an initial expense ratio of 0.06 per cent per annum, which would make it the cheapest international fund.
About Vanguard offering
Vanguard Total Stock Market ETF (VTI) tracks the CRSP US Total Market Index which comprises 4,000+ stocks, representing nearly 100 per cent of the investable equity US Market. Simply put, you get the entire US market through just one fund. Obviously, some can point out the underlying index's over-diversification, given its very long tail. But investors don't seem to mind at all, as there are $1.4 trillion in assets for this ETF launched two decades ago. A low expense ratio and a modest portfolio turnover have made the fund one of the most preferred for broader US market exposure.
Though VTI invests in US equities of all sizes - large, mid, small and micro capitalisation across growth and value styles, it has a good allocation to the most popular tech names such as Apple, Microsoft, Alphabet, Amazon, Facebook and Tesla. However, its 10 biggest holdings, including Berkshire, UnitedHealth and JP Morgan, account for 25 per cent -- not top-heavy by any standard. Also, the fund is not a tech-centric play (29 per cent) since consumer discretionary (16 per cent), healthcare and industrials (12.8 per cent each), financials (10.9 per cent), consumer staples (4.7 per cent) etc. give it a rounded nature.
Portfolio & performance
CRSP US Total Market Index, the benchmark for the Vanguard ETF, scores a point by virtue of exposure to multiple sectors. In contrast, many of the US-focussed passive funds currently offered by other mutual fund houses in India have Nasdaq 100 as their benchmark, which has a higher exposure to the technology sector. Hence, this is a lower risk path.
And, the recent US market sell-off has shown what has happened to Nasdaq (down 11 per cent YTD) and individual names such as PayPal (down 30 per cent), Netflix (down 29 per cent), Zoom (down 20 per cent), AMD (down 15 per cent) etc. In comparison, CRSP US Total Market Index is down 7 per cent YTD, showing its better downside protection element, relatively speaking.
The broad-based US index has provided an annualised return (in INR terms) of 28.15 per cent, 20.11 per cent and 20.27 per cent over the last 1 year, 5 years and 10 years respectively (as of December 31, 2021), according to Navi MF.
From an Indian investor perspective, a low correlation between the equity markets of US and India and potential appreciation of dollar against rupee makes the FoF a simple, low-cost way to include US equities in their investment portfolios.
Our take
It is important for investors to consider both pros and cons for Navi US Total Stock Market Fund of Fund (FoF).
Firstly, it is a new fund and so the tracking error as well as tracking difference are unknowns. How efficiently the FoF will invest in the VTI ETF that tracks the CRSP US Total Market Index and how closely it will track performance remains to be seen. Do remember, an allocation into VTI will not beat the market, but will rather behave like the market. Investors in Navi FoF should not aim for outperformance.
Secondly, the tag of the cheapest international fund is not a permanent one, as the 0.06 per cent expense ratio is subject to change from time to time within the overall permissible expense ratio of 1 per cent. Assume for a moment, this 0.06 per cent expense ratio is constant for a long period. If you invested ₹10 lakh lump sum for 10 per cent return in 10 years in two funds, one charging 0.06 per cent and 0.50 per cent, you would end up with ₹25.80 lakh and ₹24.78 lakh i.e. a difference of a lakh.
Thirdly, while the Navi FoF will invest in the Vanguard ETF that tracks CRSP US Total Market Index , the overall impact of the stock basket is unlikely to be very unique. Around 80 per cent of Vanguard ETF weighting is within the S&P 500. Also, the top holdings are largely the same on account of the sheer mass of the largest companies. There is an existing S&P 500 index fund available to Indian MF investors, but it charges around 1 per cent expense ratio and was launched in April 2020.
Lastly, the Navi US FoF, due to its design, will, from time to time, suffer from excessive concentration in popular sectors and stocks. This is a risk but it is only in proportion to the market itself. For example, it will be currently most heavily concentrated in the technology sector.
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