By Chintan Haria, Head – Product Development & Strategy, ICICI Prudential AMC
One of the factors contributing to the Indian stock market’s outperformance relative to its global peers has been the strength of corporate earnings, led by the BFSI sector. If you want to invest in BFSI, you will find that the benchmark index-based products and actively-managed mutual fund portfolios are largely dominated by banking stocks.
With the outlook of Financial Services companies, including insurers, financial institutions, exchange and data platforms, housing financiers, asset managers, etc. improving, investors are looking at differentiated and targeted exposure to this healthy pocket of opportunity. An investor can do this by taking into account an innovative offering like the Nifty Financial Services Ex-Bank ETF. With this offering, you can use the ETF route to obtain diversified exposure to multiple themes at a low cost.
The following are the main arguments in favour of adding this offering to your portfolio:
An integral part of the $5 trillion economy
The financial services sector makes a massive contribution to the economy, which is set to hit the $5 trillion mark soon. As India becomes the fastest-growing major economy, financial services will form the basis of a billion dreams. The BFSI sector, excluding banks, is in the midst of a technology and regulatory revolution, which will have a strong impact on earnings. With the financialisation of savings taking place in a big way and participation increasing from all segments of society in credit, investments, and insurance, the sector looks poised for an upswing.
The financial services sector, excluding banks, is divided into three broad buckets: NBFCs, insurance and others. All of them are high-potential earnings compounder businesses possessing a solid runway for growth. Under NBFCs, there are asset financiers, investment companies, and loan companies. Under insurance, there are life insurers and general insurers. In the ‘others’ segment, there are brokerages, investment banking, mutual funds, and wealth management firms.
The smart way to play such a diverse set of businesses is to use an ETF-based rule-based portfolio. For this, an ETF based on the Nifty Financial Services Ex-Bank index may be the optimal approach to capture the opportunity of the top thirty stocks in the financial services sectors (excluding banks) that form part of the Nifty 500 index universe. The names in the index will be reviewed every six months.
Leading the next growth phase
Based on metrics like assets under management, NBFC public funds, total premium underwritten, and the number of Demat accounts, this basket of financial services stocks has demonstrated solid financial performance with a double-digit CAGR. In terms of market performance over the past 10 years, the Nifty Financial Services Ex-Bank has outperformed both the Nifty 50 index and the Nifty Bank index. However, even as domestic markets remain resilient, the Nifty Financial Services Ex-Bank might be one of the themes that may lead the next growth phase, thus unlocking value in the future.
Play on wealth generators
Many of the industry leaders in financial services today are proven long-term wealth generators that have wide moats and differentiated business models. As India is believed to be at the beginning of a long credit cycle, indicating growth of the sector, indirect policy support like easing the FDI policy, tax exemptions, etc., the financial services sector will benefit as the corporate sector begins to spend on capacity expansion. In addition, some sector stalwarts have recently listed while some will do so soon, which increases the playing field for the ETF for adding stocks.
The Nifty Financial Services Ex-Bank Index is less volatile than the Nifty Bank Index across all time frames. In the 3-, 5- and 10-year periods, the standard deviation of the Nifty Financial Services Ex-Bank benchmark at 29.1, 26 and 23.1 is lower than 30.7, 26.3 and 24.2 for the Nifty Bank index. From an investment perspective, a lower standard deviation indicates greater consistency, predictability, and quality.
To conclude, the Nifty Financial Services Ex-Bank is an efficient approach to play the financial services sector growth story. However, the caveat that one must have a long term-approach to capitalise from this story playing out still stands.