The equity market has been challenging for the last 6 to 9 months due to variety of concerns e.g. spread of Omicron, high commodity prices, trajectory of interest rates, the War in Ukraine, slowdown in Chinese economy etc. Over the last 6 months, the Nifty 50 is down nearly 12%, while the broader market, particularly midcap and small caps saw even deeper cuts. In this bearish market, one fund is clearly a standout performer. The CPSE ETF managed by Nippon India Mutual Fund has given 13.2% return in the last 6 months, while large parts of the stock market have been in the red.
Performance of CPSE ETF
While CPSE ETF has underperformed historically, the performance of this ETF over the last one year has been quite spectacular (see the chart below). You can see that the ETF has been able to generate high alphas in difficult market conditions.
Source: Advisorkhoj Research, National Stock Exchange. Date: As on 16th May 2022. Disclaimer: Past performance may or may not be sustained in the future.
Best performing ETF
The CPSE ETF is the best performing ETF over the last 1 year (see the table below). While many of the top performing ETFs over the last 1 year have underperformed in more recent months (mainly technology ETFs), the CPSE has been able to continue its outperformance even in highly volatile market conditions.
Source: Advisorkhoj Research. Date: As on 16th May 2022. Disclaimer: Past performance may or may not be sustained in the future.
About CPSE ETF
The Central Public Sector Enterprise (CPSE) ETF was first launched in March 2014, as part of the Government’s disinvestment initiative. The new fund offer (NFO) of the CPSE ETF was a success with the issue being oversubscribed 1.45 times. Following the success of the NFO, 3 further funds offer (FFOs) were announced, which were also resounding successes. The CPSE ETF tracks the NIFTY CPSE Total Return Index and has more than Rs 18,500 crores of assets under management (AUM).
What is CPSE ETF?
The CPSE ETF tracks the Nifty CPSE Index. This index was created as part of the Government of India’s disinvestment initiative. Public Sector Undertaking (PSU) companies, where the Government wants to disinvest its stake are included in the index. The CPSE index keeps changing both in terms of its constituents and weight of each constituent. The index is rebalanced quarterly. PSUs where the Government achieved its disinvestment target are taken out of the index and new PSUs where the Government wants to dilute its stake are added. Further, weights of index constituents are rebalanced every quarter capping weight of each constituent to 20%. Currently there are 10 PSUs in the Nifty CPSE Index.
Source: National Stock Exchange. Date: As on 29th April 2022. Disclaimer: Constituents and weights of CPSE index are subject to quarterly review and rebalancing.
Why is CPSE ETF outperforming?
- The constituents of the CPSE ETF are PSUs in the core sectors e.g. power, oil and gas, coal etc. These companies are seeing rising demand growth as the economy is recovering from COVID-19, despite high inflation.
- Power companies especially are seeing very high demand with reopening of the economy and the onset of the hot season in India. Higher demand for power has resulted in higher demand for coal.
- Oil and gas companies have also benefiting from high global commodity prices.
- Government’s spending on infrastructure and the “Make in India” initiative especially in Defence are benefiting the Infrastructure and Engineering companies.
- The valuations (P/E, P/B etc) of CPSE ETF constituents were much more reasonable compared to average Nifty valuations when the correction began.
- In an uncertain economic environment, the significantly higher dividend yield of CPSE ETF constituents is also a factor for investors.
- Finally, the stock prices of the CPSE ETF constituents were less affected by the FII sell off, since the CPSE ETFs continues to receive inflows from EPFO.
Why invest in CPSE ETF?
- In the uncertain macroeconomic environment, we expect the CPSE ETF to outperform Nifty and the broader market in the near term, due to the reasons mentioned above.
- CPSE ETF is also a good long term investment option because the ETF is made up of companies which are industry leaders.
- CPSEs are likely to beneficiaries of key Government reforms, e.g. power sector, manufacturing, defence sector reforms.
- The valuation (TTM P/E) of Nifty CPSE Index, as on 29th April 2022 is 7.27 times earnings which is significantly lower than Nifty 50 (22.01 times earnings as on 29th April 2022) and also Nifty 500 (23.15 times earnings as on 29th April 2022).
- The constituents of Nifty CPSE Index have relatively lower weights in Nifty 50. If you have investments in Nifty 50 ETF or active large cap funds with stock weights similar to Nifty 50, then investing in the CPSE ETF will add diversification to your investment portfolio.
Who should invest in CPSE ETFs?
- Investors looking for capital appreciation over long investment horizons
- You should have minimum 3 year investment tenures for CPSE ETF
- You should have high risk appetite for CPSE ETF
- You should have Demat and trading accounts to invest in CPSE ETF
- Investors should consult with their financial advisors if CPSE ETF is suitable for their investment needs.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.