Home / Markets / Stock Markets /  CPSE exchange traded fund lags Nifty in 2019

An exchange traded fund (ETF) tracking 10 central government owned companies has underperformed the National Stock Exchange’s benchmark 50-stock Nifty index this year, thanks in part to its concentration of energy stocks that have shed value.

The Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) index tracks the NSE Central Public Sector Enterprises (NSE CPSE index) of 10 public sector enterprises. According to Bloomberg data, the Nifty CPSE index lost 13.35% in 2019, while the Nifty is down just 0.6%. In August alone, the Nifty CPSE index fell 8.49%, while the Nifty is marginally down by 0.85%. Similarly, for the one year ended 3 September, Nifty CPSE index was down 24.68%, while the benchmark Nifty was down 6.77%.

A key reason is the ETF’s concentration of energy stocks, said analysts. According to HDFC Securities, currently, the scheme is concentrated around energy and oil sectors and, hence, risks arising from government-related actions, as well as company-specific risks, may affect its performance.

“Together with the advantages, investors should also keep in mind that it is not a diversified index and is skewed towards the energy sector. Any untoward global or domestic event impacting this sector will act as a negative trigger for the entire portfolio," said HDFC Securities Ltd in a note on 17 July.

The broking firm had also said that returns from the securities comprising Nifty CPSE may underperform returns from the general securities markets, or different asset classes, as different types of securities tend to go through cycles of out-performance and under-performance in comparison to the securities markets. The CPSE ETF is an open-ended, semi-diversified, thematic and passively managed ETF, which tracks and provide returns corresponding to the Nifty CPSE Index.

The Nifty CPSE ETF index is loaded with energy stocks, which make up 65.83% of its total composition, followed by metals (18.90%), financial services (7.37%), industrial manufacturing (6.37%) and construction (1.53%). Out of the 10 stocks on the CPSE ETF, energy stocks, such as Indian Oil Corp. Ltd (IOC), Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL), are down 14.5%, 21.9% and 18.2%, respectively, so far this year. IOC and ONGC have 20.77% and 19.57% weightage on the index, respectively, while OIL has 3.11% weightage. NTPC Ltd, which has the highest weightage of 20.97% in the Nifty CPSE ETF index, is down 5.3% so far this year. NBCC India Ltd, which has fallen 41.65%—the most out of the 10 stocks—have 1.53% weightage on the index.

Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser India Pvt. Ltd, said that the last one to one-and-a-half years have been tough for actively managed funds particularly in the large-cap space, with most of them underperforming benchmarks. “On analysis of the performance of large-cap indices, such as the Nifty or Sensex, one can see that a limited number of stocks have been the main drivers of this outperformance, while other stocks have lagged. Funds that were underweight such stocks due to valuation or other concerns have underperformed these benchmarks. For calendar years prior to 2018, large-cap funds on an average have outperformed benchmark indices," he said.

Another reason for the decline in the Nifty CPSE ETF index is redemptions. “There was a redemption pressure seen in the fund as one-month lock-in period for anchor institutional investors in the fifth FFO (further fund offer) of the CPSE ETF last month expired on 24 August. This could be one reason for the weakness in the fund performance," said an analyst, requesting anonymity.


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