Passive investing with Index and ETF Funds · Passive investing with Index and ETF Funds ......
Transcript of Passive investing with Index and ETF Funds · Passive investing with Index and ETF Funds ......
Passive investing with Index and
ETF Funds
The information contained herein is solely for private circulation for reading/understanding of registered advisors/distributors and should not be circulated to
investors/prospective investors.
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“Don’t look for the needle in the haystack. Just buy the haystack” – John Bogle
Indexing refers to passively investing in the all the constituents of an Index and replicating the
performance of the index as closely as possible.
Indexing provides diversification benefit through exposure to each and every stock in the index
Indexing – An Introduction
The information contained herein is solely for private circulation for reading/understanding of registered advisors/distributors and should not be circulated to
investors/prospective investors.
Advantages of Indexing include:
Disadvantages of Indexing are as below:
Low cost Diversification Trading at real time NAV in
case of ETFs
Index is based on research
and back tested data
Transparency in holdings
and price
Periodic portfolio
rebalancing
No investor discretion No customisation /
flexibility
No Fund manager
expertise
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Various vehicles available for Indexing in India
Equity ETFs
oMarket capitalisation based
oDisinvestment theme based
oSmart Beta
oSectoral / Thematic
Debt ETFs
oMoney Market
oGilt based
Commodity ETFs
oGold ETFs
The information contained herein is solely for private circulation for reading/understanding of registered advisors/distributors and should not be circulated to
investors/prospective investors.
I. Index Funds:
"The index fund is a sensible, serviceable method for obtaining the market's rate of return with absolutely
no effort and minimal expense. Index funds eliminate the risks of individual stocks, market sectors and
manager selection, leaving only stock market risk.“ – John Bogle
The first index funds was launched in the year 1975 by Vanguard based on the Index 500 has grown to
over $ 260 billion as on date
II. ETFs:
ETFs are similar to index funds and are actively traded on the exchange. Following are a few types of ETFs
available in India:
III. Fund of Funds investing in ETFs
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Growth of ETFs Globally
Assets under Management (AUM) of ETFs across the globe has grown exponentially from $453 bn
in 2005 to $6,613 bn in March 2019 – a CAGR of over 20%
Data Source: www.etfgi.com. Data as on March 2019. The information contained herein is solely for private circulation for reading/understanding of registered
advisors/distributors and should not be circulated to investors/prospective investors.
Growth of ETFs in India
• Indian ETF industry has seen rapid growth in last 3 years.
• Recent investments in ETFs:
EPFO’s apex decision making body is considering to increase investments in equity ETFs to 15%
of the investible deposits. The major contribution towards AUM of ETFs is by EPFO.
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Data Source: MFI Explorer Data as April 30, 2019. EPFO: Employee Provident Fund Organisation. The information contained herein is solely for private
circulation for reading/understanding of registered advisors/distributors and should not be circulated to investors/prospective investors.
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Concept of Smart Beta ETFs
The Next Big Leap in Fund Management
P/E – Price to Earning Ratio, P/B- Price to Book Ratio, EV/EVIBTA – Enterprise value / Earnings Before Interest Tax Depreciation and amortization, ROIC – Return on
Invested Capital. The above list of factors is illustrative and not exhaustive. The information contained herein is solely for private circulation for
reading/understanding of registered advisors/distributors and should not be circulated to investors/prospective investors.
• Smart Beta ETFs combine both Passive and Active fund management strategies
• Smart beta seeks to move away from market capitalisation- based weighing patterns
• Smart beta seeks to improve returns, reduce risks and enhance diversification by investing in single factors like Volatility,
Value etc. or multiple factors i.e. combination of aforementioned factors.
Factors
Parameters
Data Source
Value
• Low P/E
• Low P/B
• High Div. Yield
• High EV/EBITDA
• Low Price/Sales
Annual Report
Low Volatility
Low Standard
Deviation of Price
Returns
Previous one year
Stock price
Quality
• High ROE
• Low Volatility in
earning surprise
• High ROIC
• Low Debt/Equity
Annual Report
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Assigning weights the Smart Way
Data as on April 30,2019. Source:Niftyindices.com. The information contained herein is solely for private circulation for reading/understanding of registered
advisors/distributors and should not be circulated to investors/prospective investors.
Usually assign weights using full market capitalisation method like Nifty 50 Index. Higher the market cap of stocks ,
higher is the weightage of such stocks
Smart Beta Indices assign weight based on relevant factors. For e.g. Low Volatility index assigns weight based on the
below formula: Weight = [(1/ Volatility)/ sum (1/ Volatility)]
Below is the list of Top 5 constituents:
Nifty 50 Index Nifty 100 Low Volatility 30 Index
Less volatile stock gets
higher weightage
High volatile stock gets lower
weightage
Security Volatility (Risk) Weight
A 10.2 4.2%
B 13.4 3.2%
C 16.0 2.7%
D 19.8 2.2%
E 22.0 1.9%
. . .
Company Weight (%)
HDFC Bank Ltd. 5.1
ITC Ltd. 4.0
Hindustan Unilever Ltd. 3.9
Wipro Ltd. 3.9
NTPC Ltd. 3.9
Company Weight (%)
HDFC Bank Ltd. 11.0
Reliance Industries Ltd. 10.0
HDFC 7.0
Infosys Ltd. 6.0
ICICI Bank Ltd. 6.0
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Performance of Smart Beta Indices
Low volatility = Nifty 100 Low Volatility 30 Index, Value = Nifty 50 value 20 Index, Quality=Nifty 100 Quality 30 Index, Multi factor = NIFTY Alpha Quality Low
Volatility 30. Data as on April 30,2019. Source: Niftyindices.com. Index variant considered is Total Return Index variant. Past performance may or may not be
sustained in the future. The information contained herein is solely for private circulation for reading/understanding of registered advisors/distributors and should
not be circulated to investors/prospective investors.
Below graph depicts that use of multiple factors strategy has resulted in better returns over the last decade.
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Low Volatility Value Quality Multi Factor Nifty 50
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Growth of Smart Beta ETFs Globally
Data Source: Internal. Data as on December 2018. The information contained herein is solely for private circulation for reading/understanding of
registered advisors/distributors and should not be circulated to investors/prospective investors.
US $ 800 bn – Asset Size of Smart Beta equity ETFs globally as of December 2018
Assets under Management (AUM) of Smart Beta ETFs across the globe has grown eight fold from
$100 bn in 2008 to $800 bn in 2019 at a CAGR of ~21%
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Smart Beta ETFs AUM ($ Billion)
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“The trick is not to pick the right company. The trick is to essentially buy all the big companies
through the S&P 500 and to do it consistently.” – Warren Buffett
Passive investing allows investors to take exposure to all the constituents in the underlying
index and diversify their portfolio
Passive Funds follows a predetermined strategy irrespective of the market dynamics which
limits the overall churn of the portfolio
No emphasis has to be laid on the past performance of the passive fund as it tracks the
underlying index
It has been witnessed that passive investing has generally done well over a long period of time
A meaningful allocation towards passive funds will help investor generate closer to market
returns for such allocation along with the return generated by allocation to Active Funds
Passive investing as a part of overall portfolio
The information contained herein is solely for private circulation for reading/understanding of registered advisors/distributors and should not be circulated to
investors/prospective investors.
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Passive Investing can be used as a strategic allocation tool as part of the overall portfolio to generate positive investment
experience for the investor. Below are a few illustration for the same:
Strategy 1 Strategy 2 Strategy 3
Performance of various strategies over the long run
Passive Investing – A tool for Strategic Allocation
Source: MFI explorer. Data as on May 14, 2019. Past performance may or may not be sustained in future. The information contained herein is solely for private
circulation for reading/understanding of registered advisors/distributors and should not be circulated to investors/prospective investors.
60.0%
30.0%
10.0%
Nifty 50 TRI Nifty 100 Low Volatility 30 TRI S&P BSE MidCap Select Index TRI
50.0%
35.0%
15.0%
50.0% 50.0%
Nifty 50 Value 20 TRI
Portfolio
1 Year
(% CAGR)
3 Years
(% CAGR)
5 Years
(% CAGR)
10 Years
(% CAGR)
Active Funds 0.7 11.4 11.3 14.4
Strategy 1 2.7 13.6 12.2 15.3
Strategy 2 1.8 13.3 12.6 15.8
Strategy 3 7.0 15.1 12.9 18.0
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Tactical allocation is the practice of fine-tuning an investment portfolio to meet changing market conditions.
Tactical allocation can be made to various Equity ETFs to benefit from the performance of different indices at different
points of time
Gold as a precious metal has done exceptionally well during certain periods in the past. Gold acts as a natural hedge
against falling equity markets and allocation can be made to Gold ETFs in such a scenario.
Advisors can also advise to allocate to Liquid . Benefits / use case of investing in Liquid ETFs include:
o Short term parking of funds
o Can be used for matching trades
o Can be provided as margin with applicable haircuts.
Passive Investing – A tool for Tactical Allocation &
Operational Ease
The above list is indicative and not exhaustive. The information contained herein is solely for private circulation for reading/understanding of registered
advisors/distributors and should not be circulated to investors/prospective investors.
Exposure to 500 stocks
i.e. 95% of listed
universe
S&P BSE 500 / Nifty 500
Exposure to large caps
S&P BSE Sensex/Nifty
50/Nifty Next 50/Nifty
100
Exposure to mid caps
Nifty Midcap 150/ S&P
BSE
Exposure to smart beta
ETFs
Nifty 100 low Vol 30 /
Nifty 50 Value 20
Exposure to
disinvestment theme
ETFs
S&P BSE Bharat 22 /
Nifty CPSE
Exposure to specific
sectors/theme
Nifty Bank / Nifty
Private Bank
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Exchange Traded Funds are traded on the exchange at real-time NAVs. Trading on the exchange means ETFs entail a
certain transaction cost. Below is an Illustration on the costs involved in ownership of Nifty ETF:
The ownership cost per year reduces substantially as the holding period increases, as brokerage and other allied charges
are incurred only on sale and purchase.
Hence, holding ETFs for long term is a better proposition for the investors.
Cost of ownership of an ETF
The above is for Illustrative purpose only. The information contained herein is solely for private circulation for reading/understanding of registered
advisors/distributors and should not be circulated to investors/prospective investors.
Particulars
1 year
Expense (bps)
3 years
Expense (bps)
5 years
Expense (bps)
TER disclosed in the fact sheet 5 15 25
Demat charges 1 3 5
Brokerage on buying an selling
(assumed 10 bps each side) 20 20 20
GST on brokerage 3.6 3.6 3.6
Spread on exchange counter
(assumed 5 bps each side) 10 10 10
Total cost of ownership per year 39.6 17.2 12.7
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To Sum it up…..
The information contained herein is solely for private circulation for reading/understanding of registered advisors/distributors and should not be circulated to
investors/prospective investors.
Passive investing through Index Funds and ETFs has reaped rewards for long term investors
As a result, index funds and ETFs have attracted investor attention and grown in their AUM size
Passive investing allows investors to diversify their portfolio through exposure to all the stocks
in the Index
Passive investing reduces costs through lower fees, lower transaction charges and lower tax
incidence
Smart Beta ETFs allows a combination of passive and active investing by the use of single or
multiple factors and are the next big leap in fund management globally
Allocating a meaningful portion of the portfolio will help toward creation of a diversified
portfolio while also delivering closer to the market returns in the long run
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Disclosures
The information contained herein is solely for private circulation for reading/understanding of registered advisors/distributors and should not be circulated to
investors/prospective investors.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Disclaimer: All figures and data given in the document are dated unless stated otherwise. In the preparation of the material contained in this
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the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made
available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources.
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