Should you invest in the Mirae Nifty India Manufacturing ETF NFO?

Mirae Asset Mutual Fund has launched Mirae Asset Nifty India Manufacturing ETF, an open-ended scheme tracking Nifty India Manufacturing Total Return Index (TRI). Simultaneously, the Mirae Asset Nifty India Manufacturing ETF FoF, an open-ended fund of fund (FoF) scheme predominantly investing in Mirae Asset Nifty India Manufacturing ETF, is also open for subscription. While the NFO period of the ETF will close on January 20, the ETF FoF will close on January 24. As is evident, these are passive investing products based on the broad theme of manufacturing. The existing thematic funds with a similar mandate are actively managed viz. ICICI Pru Manufacturing and ABSL Manufacturing Equity. Thus, the ETF and the FoF are a way to take exposure to manufacturing theme at a relatively low cost using rule-based investment approach.

Driving force

Manufacturing in India has the potential to be a major driving force for the economy. Manufacturing's (value-added) contribution to the GDP, at about 15 per cent in 2020, is expected to rise to 20 per cent in this decade. While India's manufacturing share in GDP has remained relatively low compared to other economies such as China and Thailand (above 25 per cent each), the government is seeking to focus on this space to remain globally competitive. To do this, the government has launched various initiatives such as Production Linked Incentives (PLI), Make In India, National Manufacturing Policy, Skill India, Samarth Udyog etc.

It is well-known that services and consumption have been hot-favourite investment areas for equity investors, but if the manufacturing push works, it could generate business opportunities in our large domestic market as well as provide increased export opportunities, thereby strengthening the investment case in the related stocks. The manufacturing sectors in focus are automobiles, pharma, electronics, white goods, food products, steel, textiles, solar PV modules, medical devices and advanced chemicals.

Underlying index and performance

Mirae Asset Nifty India Manufacturing ETF & FoF are based on Nifty India Manufacturing TRI. The stocks in this index are selected from a combined universe of Nifty 100, Nifty Midcap 150 and Nifty Smallcap 50 index. So, stocks from Nifty 100 account for 63 per cent weight, those from Nifty Midcap 150 account for 36 per cent and the rest from Nifty Small Cap 50. This gives the index, with 79 constituents, a largecap tilt. The index was launched only in August-2021, and is rebalanced semi-annually. A stock's weight in the Nifty India Manufacturing index is based on its free-float market capitalisation subject to maximum weight of each stock at 5 per cent. Top holdings are RIL, Sun Pharma, Tata Steel, Maruti Suzuki, Tata Motors, M&M, Hindalco, JSW Steel, Divi's and Dr Reddy's. The index also has a minimum weight of 20 per cent to certain manufacturing sectors such as automobile and industrial manufacturing. This apart, sectors with high representation currently are pharma (17.7 per cent), metals (14.8 per cent), oil & has (8.8 per cent), chemicals (6.8 per cent) and consumer goods (6.7 per cent).

The Nifty India Manufacturing index has a base date of April 1, 2005. In the 16 years, from 2006 to 2021, the index has outperformed Nifty 50 in 7 years, which isn't great. Importantly, the out-performance has occurred regularly since 2014 viz. Nifty India Manufacturing beat Nifty 50 in 6 of last 8 calendar years. This time period coincides with the renewed government focus on manufacturing and market rally. Also, the annualised volatility (risk) of the manufacturing index is comparable to Nifty 50 in 10-year, 15-year and since inception period, while being a tad of the higher side on 5- and 7-year periods.

The actively managed funds with similar mandate have less than 10-year history and so the analysis is limited to that extent. ABSL Manufacturing has outperformed Nifty India Manufacturing index in 4 of 6 calendar years while ICICI Pru Manufacturing has done so in 2 of 3 years. During their worst monthly drawdown (20-Feb-2020 to 23-Mar-2020), the funds contained losses in 30-34 per cent range compared to the index's over 36 per cent decline.

Outlook

Thematic fund mandates usually have a narrow scope and thus their performance is deeply linked to timing. This is a reason investors are often told to cap total thematic exposure to 10-15 per cent of their overall equity allocation.

However, manufacturing themed funds, be actively managed or passively managed, have a broader reach since they are a play on a significant part of the economy. Do note this index, and by extension the ETF and the FoF, offer no exposure to sectors such as Financials and IT which dominate fund portfolios and Nifty 50 currently. Financials, including banks, occupy the highest weight in many diversified funds. IT, a defensive bet, is a beneficiary given the global demand for technology-led transformation in the post-Covid world. But the missing presence of financials and IT may be a reason why Nifty India Manufacturing index trades a price to earnings valuation multiple of 19 times, a 25 per cent discount to Nifty 50.

This ETF and FoF will not have any fund manager risk on account of its passive nature. But, whether India actually turns out to be a manufacturing hub as envisioned remains to be seen, and that is the inherent risk. Some manufacturing sectors are at crossroads due to market dynamics. For instance, two-wheeler and passenger vehicle segments are pinning hopes of recovery even as the electric vehicle (V) disruption plays out. Mobile and electronics makers are gearing up to meet demand amid global chip shortage. Pharmaceuticals have been in focus since Covid-19, but healthy earnings growth have raised expectations. Chemicals have been a hit on account of China+1 strategy, but valuations are through the roof. Metals have shown significant growth, but its future depends on the sustenance of the commodity cycle.

While the long-term outlook for manufacturing remains bright, betting a significant portion on manufacturing theme alone, at this stage, may not be an optimal strategy. Wait for more evidence to see whether the policy work is actually translating to serious expansion on the ground.

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