Exchange-traded fund: The flip side

Written by Arup Roychoudhury | Updated: Jan 15 2014, 17:29pm hrs
ETFThe new exchange-traded fund (ETF) will comprise scrips of 11 public sector companies including ONGC, Coal India, and Indian Oil.
India will, in a months 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 wont 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 has risen by about 6% during the one-year period.

It is just disinvestment with another name and there is not much underlining it, Hajra said, adding that he had not seen any interest among investors for the ETF.

The R3,000 crore that could be raised by the Centre may seem a small amount, but is much-needed given the expected shortfall in the disinvestment target of R40,000 crore for FY14. The government has so far managed to garner just R3,000 crore from stake sales in seven PSUs, including Power Grid Corp, Hindustan Copper, National Fertilisers and MMTC.

Coal India is one of those planned disinvestments that did not happen as trade unions threatened to go on strike if there was any stake sale. Hence, the CIL board has approved a special dividend of R18,300 crore of which R16,485 crore will go to the government.

The oil ministry wants the IOC stake-sale to be put on hold as the companys shares have dropped 50% since the proposal was first mooted in 2010. Meanwhile, a sharp 30% drop in power and military equipment maker Bhels share price in the last one year has forced the Centre to put a planned 5% stake sale on hold.

ETFs were introduced in India in 2001. Currently, there are about 33 ETFs having assets under management of close to R11,500 crore and held by 6.2 lakh investors. Gold ETFs dominate the ETF market in India.