DSP Mutual Fund Launches India’s First ETF Based on Equal Weight Strategy

DSP Mutual Fund Launches India’s First ETF Based on Equal Weight Strategy

DSP Investment managers announced the launch of DSP Nifty 50 Equal Weight ETF on the very first Monday of this week. The ETF is India’s first exchange-traded fund which is based on the Nifty 50 Equal Weightage Index.

The new fund offer NFO opens for subscription on October 18th and closes on October 29th, after which it could be bought and sold on the major stock exchanges, the company said.

Before taking a deep dive into the Nifty 50 Equal Weight Index lets take a quick glance at ETF:

What Exactly is ETF?

An ETF is a basket of securities whose shares are sold on the stock exchanges i.e NSE and BSE. They offer similar features and potential benefits like mutual funds, stocks and bonds.

ETFs are similar to stocks as they provide investors with a facility to trade throughout the day at prices that change based on supply and demand.

Like stocks, ETFs also possess some features of mutual funds as ETF stocks represent partial ownership of a portfolio built by professional managers.

Different Types of ETFs

There are different types of ETFs, each with a different investment focus.

Here are some of the most common ETFs.

1. Diversified Passive Equity ETFs

The returns of  Diversified Passive Equity ETFs are completely dependent on the performance of widely used equity market benchmarks such as the S&P 500, the Dow Jones Industrial Averages and more.

2. Niche Passive Equity ETFs

Niche passive equity ETFs, are those whose returns are based on the performance of S&P 500 industry subgroups or Russell 2000 small companies.

These ETFs provide investors with focused exposure to help them fine-tune their portfolio strategies.

As with passive diversified funds, these niche portfolio funds are generally made up of the same stocks that are used to calculate their benchmarks.

3. Active Equity ETFs

Active Equity ETFs allow their managers to use their own judgment when choosing investments rather than being rigidly tied to a benchmark index.

Active ETFs can have the potential to outperform a market benchmark, but they can also carry higher risk and higher costs. 4,444 bond ETFs focus more on bonds  than stocks.

4. Large Fixed Income ETFs

Large fixed-income ETFs are those that actively traded on the stock market but provide low returns or steady returns to the investors. In other words, the returns generated from large fixed income are not very high yielding.

5. Equal Weight Index ETF

In an equal weight index, each stock present in it receives equal weight. For instance, if the method is applied to the index Nifty 50, then the equal weightage index will own the same 50 companies of Nifty 50 and will have 2% weight of each company.

This method is not like the current stock market cap design where some stocks hold a large weight such as 9-10% and many stocks in the lower tail will get only 0.3%.

This provides all the companies with a fair chance to contribute equal returns than completely dependent on the top 10 company stocks.

Difference Between Nifty 50 and Nifty 50 Equal Weight

In Nifty 50, the stock weights are decided on the basis of market capitalisation and weightage changes based on the movement of the stock market. Hence, the returns generated from the market are slanting towards the stocks that possess the highest weight.

In the Nifty 50 Equal Weight Index, equal weights are assigned to each company’s stocks and the weight of each stock is reset to equal weight every quarter. Here, they provide equal opportunity for every stock to perform.

The DSP Equal Nifty 50 ETF operates on the two fundamental investment principles that invest in industry leaders who can navigate the cycles of the stock market with better diversification between companies and sectors with equal share weights, offering low specific risks and low industry concentration compared to Nifty.

Aside from a lower-cost diversified portfolio, the Nifty 50  ETF has the same weighting benefits of ease of purchase and real-time stock trading.

The equal index is reweighted quarterly. Because of this quarterly rebalancing, an equally weighted portfolio has a built-in profit mechanism that buys the underperforming at low prices and sells the best performing at high prices.

The new fund offering opens for subscription on  October 18 and ends on  October 19, after which it can be bought and sold on the stock exchanges.

Kalpen Parekh, Dr MD and CEO of DSP Investment managers has said that when we explore this concept of equally-weighted indices around the world, we find that the same weights tend to produce better returns than market capitalization-weighted indices over long periods of time.

This is done because all companies have the opportunity to participate, not just a few. Such a strategy has its underperforming phase when the benefits of the economy polarize on selected companies, as they have been for the past five years.

However, since good companies in all industries grow and create long-term value, a balancing strategy gives each company significant weight in the index.

The same weighting also ensures that the sector with the most ownership is at risk at all times, ”Parekh said.

Anil Ghelani, CFA, Director of Investments and Passive  Products, DSP Investment Managers, emphasized that equally weighted strategies exploit certain market inefficiencies due to behavioral distortions.

Since the strategy is not controlled by an excess of optimism in specific actions, the same weighting takes the benefits of certain stock market inefficiencies caused by behavioral biases.

These inefficiencies have contributed to the balanced index strategy eclipsing traditional index strategies based on market capitalization, ”says Ghelani.

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