US growth stocks index Nasdaq may slow down after the stellar gains of 25-27% in INR terms in the last 10 years; however, investors can still expect 10-15% growth going forward. On the other hand, the headline index S&P 500 has in recent years beaten NSE Nifty 50. Investors looking to build their US stocks portfolio of passive investments may consider equal parts allocation in both Nasdaq and S&P 500 ETFs for the next foreseeable future. Pratik Oswal of Motilal Oswal AMC, NK Purohit of IIFL Securities and Vinay Bharathwaj of Stockal tell Shaleen Agrawal of Financial Express Online how to build a US investment portfolio of passive investments with exchange-traded funds (ETFs). The panel discusses risk-return outlook for various ETFs, diversification strategies, and much more.
While both Nasdaq and S&P 500 have beaten Nifty in the last 10 years, luring investors to put money in US markets, India has beaten both indices in 10 years before that, Pratik Oswal, Head, Passive Funds, Motilal Oswal AMC, said. India has the second highest performing index in the last 25-30 years. Investing in both economies is a great way to diversify the portfolio so the overall returns are not dragged much, he said.
S&P 500 can be a good option as it allows investment in the top 500 firms which capture 85% of the US market. Further, it is globally diversified too, as nearly half of the revenue of these companies come from outside of the US, Pratik Oswal said. For people looking to invest in a more growth-oriented fund, Nasdaq can be a better option. Unlike S&P 500, Nasdaq does not have all the laggards like energy, utilities, financial services that S&P 500 has. A 50:50 allocation can be a good approach, as it will put both the top 500 stocks and the most growth-oriented stock in the portfolio, he said.
ETF safer bet compared to selecting and investing in individual stocks
For first time investors, who are not aware of where, when and how to invest, ETF is an ideal option as not only is it the cheapest form of investment but one can create an entire portfolio through ETFs. These funds are tax efficient as well. ETFs allow investors to invest into a particular index, commodity, sector or theme. Also, it allows people to invest into a combination of asset classes. It is the only investment instrument which allows you to create short-term or long-term portfolios, said NK Purohit, Chief Digital Officer, IIFL Securities.
ETF as an investment instrument is cherry picked by large manufacturers like Blackrock, Vanguard who conduct a lot of research before creating different ETFs. ETFs can give you the diversification you need and you can pick different ETFs as per your risk appetite, return expectation to build your portfolio rather than researching each stock individually and cherry picking 20-50 stocks to build your investment portfolio. Historically, diversification is a good investment strategy and an ETF offers that, said Vinay Bharathwaj, Co-founder, Stockal.
What to consider while buying ETFs or Index funds in US
One must look at buying the ETF or Index fund from the right manufacturer. An ETF or index fund from a manufacturer like Vanguard should be preferred as Vanguard will add a value to it because of their rich experience in managing ETFs. These ETFs will have more liquidity, explained N K Purohit. Second, in any type of investing, platform is more important and you need a platform which can help you discover, execute, track and manage your investments.
Thematic investment for extra returns
Investing in themes like electric vehicle ETFs or renewable energy for which outlook is looking positive, may help get extra returns. Investors can look at global themes ETFs like EV, renewable energy, crypto, fuel cells, AI/Robotics for potentially higher returns. Thematics is a great way to invest in something which you believe in. However, over the long time, one has to be very careful about what expectations they have. A small proportion of the portfolio can be allocated to thematic satellite ETF, said Vinay Bharathwaj.
Diversify, not over diversify
Diversification is ideal when constructing an investment portfolio as it offers some risk protection when one sector, market or economy is down. Having funds in different markets offers another layer of diversification. While having market, industry, sector and geographical diversification is good for the portfolio, overdiversification will impact returns and should be avoided.
Interesting times ahead as markets have not witnessed a pandemic like this before. Despite all concerns, there has been a huge influx of retail investors in markets. According to Bharathwaj, one can expect some Yo-Yoing in near-term as markets are driven by sentiments and with news regarding covid pouring in, there will be a dent. Overall, the outlook is very interesting. According to Purohit, Indian markets will mature and with more retail investors, the growth will be broad-based in Indian markets.
We have the urge to speculate. However, no research can prove that timing the markets works. So, what investors can do is put a small corpus and satisfy their urge but only after 80-90% of their portfolio is set for long-term. Investors must also believe in compounding as it is the secret sauce to great returns, Pratik Oswal added.