Weekly Musings – NFO Pick (Mirae Asset Nifty 200 Alpha 30 ETF)

9 Oct 2023 , 07:10 AM

UNDERSTANDING SMART BETA INVESTING

In the latest weekly coverage on mutual fund NFOs, we cover the Mirae Asset Nifty 200 Alpha 30 ETF. As the name suggests, the Mirae Asset Nifty 200 Alpha 30 ETF will be a passive fund with a difference. It is part of the latest big global trend called “Smart Beta” Trend. This smart beta funds are somewhere between active funds and passive funds in terms of risk and return potential. What a smart beta fund does is to use themes like momentum, factors etc to identify patterns even within a passive fund and search for opportunities to generate alpha. Here, the alpha is not based on stock selection, but based on identifying factors impacting the performance of stocks. Then the portfolio mix is aligned to such a shift. To simplify matters, the Mirae Asset Nifty 200 Alpha 30 ETF will do this by benchmarking to the smart beta index available with the NSE. This is ideal for a 5-7 years holding period.

RISK RETURN MATRIX FOR MIRAE ASSET NIFTY 200 ALPHA 30 ETF

In terms of portfolio risk, the portfolio of the Mirae Asset Nifty 200 Alpha 30 ETF would be higher than a pure passive fund pegged to the Nifty or Nifty 200. However, the risk would be certainly lower than the typical alpha funds that rely on stock selection. The interesting part of the Mirae Asset Nifty 200 Alpha 30 ETF is that its portfolio colour keeps changing year after year since it is naturally aligned to the most happening stories in the market. For example, in the current year, the most weighted sectors in the Mirae Asset Nifty 200 Alpha 30 ETF are capital goods and financial services, which are also incidentally the best performers of the year. 

This makes the particular index and smart beta strategy a high performer over a period of time. It tends to outperform the generic indices. It must be noted here that the regulatory environment for such smart beta funds is still evolving and we need to see how it evolves in the coming years. One needs to see the impact when more such funds come into the market. That is something investors must bear in mind before investing in the Mirae Asset Nifty 200 Alpha 30 ETF. The NFO of Mirae Asset Nifty 200 Alpha 30 ETF opens on October 09, 2023 and will close for subscription on October 18, 2023.

SMART BETA COMBINES THE BEST OF ACTIVE AND PASSIVE

Let us begin by understanding that the Mirae Asset Nifty 200 Alpha 30 ETF is a smart beta fund. That is somewhere between an active fund and a passive fund. Let us understand the essential difference between the three.

• An active fund follows an active strategy, which looks to identify stocks that can outperform the market index in the long run. The idea is to exploit the marketing mispricing and the valuation inefficiencies. This helps them to generate alpha or excess returns over what the investors can earn on the index.

   

• Passive funds or passive strategies just peg the fund to an index like the Nifty or Nifty 200 or Nifty 500 and only manage the tracking error. That measures if the fund is tracking the index properly or not. Passive funds are much lower on risk and also lower on returns. Even the costs on passive funds are much lower, compared to active funds.

   

• The third is the category of smart beta funds, that are rather big globally, but the concept is still quite new in India. These smart beta funds use a mix of rule based frameworks and factors to create a portfolio that can perform better than a passive fund through a purely rule-based approach. Compared to passive funds, the smart beta funds like Mirae Asset Nifty 200 Alpha 30 ETF are higher on the risk scale and also entail higher costs due to consistent churn. However, the returns are also higher in these cases.

To sum it up, the total returns generated by the fund today has 4 components viz. Market Beta, value/growth beta, factor beta and alpha. The passive fund looks only at the first item the active fund looks at all 4 items while the smart beta funds look at the first 3 items.

PROS AND CONS OF SMART BETA INVESTING

Let us first look at the merits of smart beta investing as a strategy.

• The smart beta strategy generates alpha, the difference being that it breaks down the returns into more granular pieces. It makes it possible to generate low risk alpha.

   

• Since the smart beta funds are largely rule based, the investors can avoid the risk of being caught up in the vagaries of fund manager discretion. It is largely rule-based.

   

• One of the most common smart beta strategy, which this fund will follow, is factor investing. This boosts portfolio returns, without adding too much of volatility risk.

   

• The proof of the pudding lies in the eating and empirical data shows that factor based smart funds like Mirae Asset Nifty 200 Alpha 30 ETF can generated higher risk-adjusted returns

Let us now turn to the downside risks of smart beta investing. 

• Many of the factors typically tend to be cyclical in nature and carry the risk of persistent underperformance; like capital goods post 2011 or PSU banks post 2016.

   

• The smart beta strategy tends to be sector agnostic. Hence it has the potential to skew your portfolio towards one or few sectors, which can be risky in a downturn.

   

• One risk we must not miss is that the factor strategies are all based on empirical data and even with the best data quality past data can be often misleading about the future.

   

• One must not lose sight of the fact that smart beta funds like the Mirae Asset Nifty 200 Alpha 30 ETF will be higher on the cost scale due to churn and active strategies.  

Like any product, smart beta products like the Mirae Asset Nifty 200 Alpha 30 ETF also have their pros and cons. More importantly, they offer a new way to seek alpha with lower risk.

HOW ARE FACTORS CAPTURED IN SMART BETA FUNDS?

This is perhaps the most important part of a smart beta strategy. Factor investing about identifying and investing in defined traits to target a desired performance. Such factors can be low volatility, quality, size, value, growth, dividend yield, momentum etc. Let us look at how some of the factors once identified, can be targeted for an investment strategy.

• Momentum stocks capture recent performance best. They work well in bull markets but can be risky in downturns. The Mirae Asset Nifty 200 Alpha 30 ETF is such a strategy.

   

• The second is value factor approach where the focus is on stocks where prices are low compared to fundamental value. This works best in a cyclical recovery.

   

• The third is low size factor where the focus is on stocks in the mid-cap and small cap space. This strategy works best in the midst of a broader market rally.

   

• The fourth is low volatility factor approach where the focus is on stocks with low levels of beta or idiosyncratic risk. This works best in turbulent market conditions.

   

• The fifth is the dividend yield factor approach where the focus is on stocks that offer higher than median dividend yields in the market. This works best in dull markets.

   

• The sixth is the quality factor approach where the focus is on stocks characterized by low debt and stable earnings. This works best in the midst of a bear market.

The Mirae Asset Nifty 200 Alpha 30 ETF has adopted the momentum based approach which his biased towards recent outperformers. This pre-supposes a bull market to sustain for some time.

SMART BETA INVESTING; HOW HAS IT PERFORMED IN THE PAST?

This is the proof of the pudding and will set the tone for the Mirae Asset Nifty 200 Alpha 30 ETF NFO. Let us look at performance of the Nifty 200 Alpha 30 ETF (the benchmark to which this Mirae Fund will be benchmarked).

• Let us first compare the Nifty 200 Alpha 30 index across other indices like Nifty, Nifty 200, and the Nifty Low Volatility index. The Nifty 200 Alpha 30 ETF, in the last 12 major market moves in 18 years, has been the best performer on 7 occasions, and the worst performer only on 4 occasions. Downturns have not been too kind to Nifty 200 Alpha 30.

   

• If you compare the returns on the Nifty 200 Alpha 30 with the Nifty 50 index over the last 18 years, the Nifty 200 Alpha 30 ETF has been a clear outperformer in terms of wealth creation. The wealth creation, compared to Nifty 50 is almost 2X over 18 years.

   

• The Nifty 200 Alpha 30 has captured trends best. In 2018; FMCG and IT dominated while in 2019; BFSI dominated while in 2020; healthcare dominated. Then in 2021; IT and metals dominated while in 2022; BFSI and capital goods have dominated and that has repeated in 2023 also. In terms of catching leaders, the index is ahead of the curve.

   

• The Nifty 200 Alpha 30 outperformed the market cap weighted indices like Nifty 50 and Nifty 200 across different time frames like; 15 years, 10 years, 7 years, and 5 years. If you look at the last 11 calendar years, the Nifty 200 Alpha 30 has given positive returns only in 2 years with positive returns in all the other years. In 8 out of the last 11 calendar years, the Nifty 200 Alpha 30 index has been among the top two performers.

The proof of the pudding is quite compelling. For that one needs to understand the highlights of the fund and for whom it is a good fit. 

HIGHLIGHTS OF MIRAE ASSET NIFTY 200 ALPHA 30 ETF NFO

The Mirae Asset Nifty 200 Alpha 30 ETF NFO is a smart beta fund (between active and passive) and will focus on  a passive approach to mirroring the index. Here are the key highlights of the Mirae Asset Nifty 200 Alpha 30 ETF.

• The Mirae Asset Nifty 200 Alpha 30 ETF NFO opened for subscription on October 09, 2023 and will close for subscription on October 18, 2023, both days inclusive. The scheme will reopen on October 23, 2023.

   

• It is an open ended ETF, targeted at investors with a slightly higher tolerance for risk but looking for a relatively low cost option to generate rule-based smart beta. Past performance, has been good, but not necessarily suggestive of the future.

   

• The Mirae Asset Nifty 200 Alpha 30 ETF is a passive fund benchmarked to the Nifty 200 Alpha 30 index. It is a smart beta factor index and entails higher churn than normal passive funds. Hence risk and costs are relatively higher in such smart beta funds. 

   

• There are no entry loads in India as per SEBI regulations and this fund is also not charging exit loads, being an ETF. NFO subscriptions can be made in minimum lumpsum parcels of Rs5,000 and multiples of Rs1 thereafter. 

   

• The Mirae Asset Nifty 200 Alpha 30 ETF will be managed by fund managers, Ekta Gala and Vishal Singh. For purposes of taxation, it will be treated as an equity fund.

The Mirae Asset Nifty 200 Alpha 30 ETF is meant for the savvy investor looking at smart beta strategies. Risks and costs may be relatively higher than passive funds, but returns have been historically higher too.