Ignore the PSU ETF index, pick a few PSU stars instead

Updated: Mar 15 2014, 06:54am hrs
MCPSE index is based on the free-float m-cap of constituents and assigns a weightage of close to 59% to energy sector. PTi
The government is looking to raise around Rs 3,000 crore from the Central Public Sector Enterprises Exchange-traded Fund (CPSE ETF) that opens for subscription next week. However, the past performance of the CPSE index, which comprises 10 PSEs, might leave investors cold, reports Devangi Gandhi in Mumbai.

Although in the last one month the hope of favourable election results have pushed up the stock prices of CPSE constituents, the index has underperformed the 30-share benchmark Sensex both in the last one year and over three years.

The CPSE index is based on the free-float market cap of the constituents and assigns a weightage of close to 59% to the energy sector. This in itself could be a disadvantage given the earnings potential of companies like ONGC is dependent on the governments subsidy-sharing formula; ONGC on average picks up roughly 40% of the annual under-recoveries of oil marketing companies and this has hurt its ability to invest. While ONGC will no doubt benefit from the higher price of gas from April 1nearly double the current $4.2 per barrelthe impact on GAIL, another big constituent of the

CPSE index, will be marginally negative.

As for Coal India, the third biggest stock in the index, while the stock has done well, there are question marks on how much it can ramp up production going ahead. Given the run-up in the markets is based on expectations that the BJP- led NDA alliance might come to power resulting in faster project clearances and some roll-back in social welfare spending, stocks like BHEL and NTPC might end up rallying more. These stocks, however, are not in the index.