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With US markets tumbling much more than Indian markets so far this year, this is a good time for investors looking to diversify their portfolios and to acquire a US dollar hedge, to buy into US-centric equity funds. But SEBI’s continuing curbs on international funds based out of India tend to limit choices at this juncture.
Mirae’s S&P 500 Top 50 Exchange Traded Fund (ETF) presents a good option to capitalise on the US market fall. This fund’s underlying index offers you exposure to the top mega-caps in the US market. It has fallen 22.6 per cent on a year-to-date basis in US dollar terms, while its 5-year dollar returns are at 10.7 per cent. The Indian ETF has fallen 18.3 per cent on a YTD basis and doesn’t have a 5-year record. The expense ratio is 0.59 per cent.
Features
The S&P 500 index is the most widely tracked broad market benchmark in the US, with many seasoned investors including Warren Buffett recommending it as then best way to own US stocks. The S&P 500 Top 50 index further filters this universe to own only the top 50 stocks in S&P 500. Both stock selection and their relative weights in this index are decided by the free float market cap of the individual constituents.
By end-May 2022, Top 50’s top five holdings were tech stocks - Apple Inc, Microsoft, Amazon, Alphabet, Tesla. But these were followed by Berkshire Hathaway, Johnson & Johnson, UnitedHealth, Nvidia, Meta and Exxon Mobil.
Why buy
There are three arguments in favour of initiating buys in the Mirae Asset S&P Top 50 ETF now.
Focus on bluechips: When the going gets tough in any economy, its largest companies survive the upheavals better than their smaller rivals. Large companies usually enjoy durable moats in the form of high brand recall, dominant market share, extensive distribution network or a network effect that helps them retain both pricing power and customers in a downturn. The mega-caps that figure in this fund’s portfolio – from Apple to Exxon Mobil and Visa, fit this description.
Less downside: When a bear market hits, investors first look to bargain hunt in large-cap stocks before turning to mid or small-caps. Thus, large-caps contain downside better than the rest of the market in a brutal or extended bear phase and rebound more quickly when conditions improve. S&P 500 Top 50 represents the leading mega-caps of not just the US market but also of the global listed universe. The median m-cap of the stocks making up this index is $232 billion with the top stock at $2428 billion.
Diversified exposure: A S&P 500 based fund would offer a more diversified exposure to investors beyond US tech companies, that are in the throes of a bear market. Indian investors looking to take the fund route to US equities have three broad choices. They can take concentrated exposure to US tech via Nasdaq 100 or FAANG funds, buy the broader market through S&P 500 or cherry pick US stocks through actively managed US funds or funds such as Mirae S&P 500 Top 50 Fund. With the Nasdaq 100 correcting over 30 per cent YTD and trading at a PE (price to earnings) of about 24, it may appear an attractive choice for risk-takers. But given that tech stocks have been the main beneficiaries of the easy money flows from central banks and have seen significant re-rating during Covid, they appear more vulnerable to the popping of the liquidity bubble than consumer or industrial stocks. An extended US recession, if it materialises, can hurt industrials and consumer stocks too. But their lower valuations offer some cushion.
As S&P 500 funds based out of India are presently closed, the Top 50 ETF presents a good alternative. As the accompanying table shows, the S&P 500 Top 50 Index, is currently placed between the S&P 500 and the Nasdaq 100 in terms of valuations.
Risks
With an expected GDP growth of 6.5-7 per cent in real terms and 12-13 per cent in nominal terms, the Indian economy is today better placed than the US where there’s an emerging risk of recession. Excesses unleashed by central banks and the Covid stimulus have also created bigger bubbles in the US market than in India. While US earnings could be at risk of sharp downgrades if recession fears come good, Indian earnings (though they could be downgraded too) are on a stronger wicket backed by an expanding economy. These factors argue for Indian equity investors to view US equity funds only as a diversification bet at this juncture, without going whole hog on them. If you don’t own a 10-15 per cent portfolio exposure to US stocks you can use the recent fall to acquire it. But if you were already over-invested in US stocks prior to the fall, additions beyond this proportion are not recommended.
While the S&P 500 Top 50 index has corrected sizeably from its highs, its valuations (at 23 PE and 6 times book) are not exactly cheap. There could be considerable downside even from current levels. To take advantage of further falls, it would be good to deploy your cash into this ETF in phases or to do a SIP.
ETFs in India are subject to risks of patchy secondary market liquidity and returns diverging quite a bit from the underlying. The Mirae S&P 500 Top 50 ETF is also subject to this risk.
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