Exchange-traded fund: The flip side

Jan 15 2014, 11:59 IST
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The new exchange-traded fund (ETF) will comprise scrips of 11 public sector companies including ONGC, Coal India, and Indian Oil. The new exchange-traded fund (ETF) will comprise scrips of 11 public sector companies including ONGC, Coal India, and Indian Oil.
SummaryM-cap-based weightage will practically make it an ETF of Col India and ONGC.

India will, in a month’s time, launch a new exchange-traded fund (ETF) that will comprise scrips of 11 public sector companies. The government hopes to raise Rs 3,000 crore in disinvestment proceeds through this mechanism. Goldman Sachs will be the asset management company for the fund.

An ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Its biggest advantage is that it provides diversification to an investor and is cheaper to invest in. That is, the brokerage fees paid will be the same as that for trading in an individual stock. Apart from that, one can short an ETF just like an individual stock.

This is a good initiative, with some proven, blue-chip stocks like ONGC, Coal India, GAIL, Power Grid, Indian Oil and BEL as part of the basket. However, economists and analysts say certain features of the proposed ETF negate the benefits of an ETF.

The weightage of stocks in the proposed ETF will be based on market caps and, thus, the biggest names, ONGC and Coal India, will form the largest chunk of the fund. For example, the combined market cap of the two giants is about R4.33 lakh crore, much higher than the combined market cap of R2.43 lakh crore for the other nine stocks in the basket. Analysts say that the performance of Coal India and ONGC will reflect the fund more than the other members, hence there won’t be much diversification.

“If you are talking in terms of valuation, the overall weightage is heavily tilted towards the two big names,” said Madan Sabnavis, chief economist with Care Ratings. Sujan Hajra, chief economist with Anand Rathi securities added that because of the heavy weightage of Coal India and ONGC, investors might find investing in individual companies more attractive rather than put their money in the proposed ETF. “If I want to invest in big PSUs, I would rather buy into ONGC and Coal India separately rather than investing in a basket which also has smaller companies,” Hajra said.

Also, 10 of the 11 scrips are trading lower than they did a year ago. The only one to have yielded positive returns is Container Corp, which, going by its market cap of Rs 14,573 crore, will just have a weightage of 2.16% of the entire ETF. This, at a time when the Sensex

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