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SBI – ETF Quality: Can It Enhance The Quality Of Your Portfolio?

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SBI Mutual Fund has launched a passively managed fund, SBI–ETF Quality an open-ended scheme that will benchmark its performance against the Nifty 200 Quality 30 Index.

SBI-ETF Quality Fund, as per the mandate, will allocate 95% of its assets in securities covered by the Nifty 200 Quality 30 Index.  It aims to generate returns by investing in securities that are a part of Nifty 200 Quality 30 Index for a longer time horizon.

About NIFTY 200 Quality 30 Index

The NIFTY 200 Quality 30 Index (launched in April 2018) includes top 30 companies from its parent NIFTY 200 index, selected based on their ‘quality’ scores. The quality score for each company is determined based on return on equity (ROE), financial leverage (Debt/Equity Ratio) and earning (EPS) growth variability analysed during the previous 5 years.

The index series has a base date of April 01, 2005 and a base value of 1,000.

  • Stocks from NIFTY 200 index at the time of review are eligible for inclusion in the index.

  • 30 companies with higher profitability, lower leverage and more stable earnings are selected to be part of the index.

  • The weight of each stock in the index is based on the combination of stock’s quality score and its free float market capitalization.

  • The index is rebalanced semi-annually.

Now given that the Nifty 30 Quality index is a purely equity-based index, there is extremely high concentration risk involved.

Hence SBI-ETF Quality fund is suitable for investors having the stomach to assume high risk and ready to stay invested for longer durations of at least 5 years.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

How will SBI–ETF Quality allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of the SBI-ETF Quality Fund will be as follows:

Further, the Scheme Information Document also states that the Scheme may invest in derivatives at the time of portfolio rebalancing. These investments, however, would be for a short period of time.

The notional exposure of the Scheme in Derivative instruments shall be restricted to 5% of the net assets of the Scheme. The combined exposure of money market securities and gross notional exposure of derivatives instruments shall not exceed 100% of the net assets of the Scheme.

Note that the:

  • The scheme will not make any investment in ADR/ GDR/ Foreign Securities/ Securitised Debt.

  • The Scheme shall not invest in repo in corporate debt.

  • The Scheme shall not engage in short selling.

  • The Scheme shall not invest in unrated debt instruments.

  • The Scheme may engage in stock lending and borrowing in accordance with SEBI (Mutual Funds) Regulations.

The Scheme, in general, will hold all the securities that comprise of the underlying index (i.e. The NIFTY 200 Quality 30 Index) in the same proportion as the index. The expectation is that, over a period, the tracking error of the Scheme relative to the performance of the underlying index will be relatively low. The Investment Manager would monitor the tracking error of the Scheme on an on-going basis and would seek to minimize tracking error to the maximum extent possible. However, there is no assurance or guarantee the Scheme will achieve any particular level of tracking error relative to the performance of the underlying index.

What will be the investment strategy?

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The Scheme will track Nifty 200 Quality 30 index and will use a “passive” or indexing approach in the endeavour to achieve the Scheme’s investment objective.

Unlike other funds, SBI–ETF Quality will not try to “beat” the market it tracks and does not seek temporary defensive positions when market decline or appear overvalued. The fund does not make any judgments about the investment merit of a particular security nor will it attempt to apply any economic, financial or market analysis.

Indexing eliminates active management risks regarding over/ underperformance vis-à-vis a benchmark. Since the scheme is an exchange-traded fund, the scheme will only invest in the securities constituting the underlying index.

However, due to changes in the underlying index (due to reconstitution, addition, deletion, etc.) SBI–ETF Quality may temporarily hold securities which are not part of the index. The fund manager’s endeavour would be to rebalance the portfolio in order to mirror the index; but, there may be a short period where the constituents of the portfolio may differ from that of the underlying index. These investments which fall outside the underlying index as mentioned above shall be rebalanced within a period of 30 days.

Note, to form a part of NIFTY200 Quality 30 Index, stocks should qualify the following eligibility criteria:

  • Stocks should form part of NIFTY 200 index at the time of review

  • Constituents should have a minimum listing history of 1 year

  • The stock should be available for trading in the derivative segment (F&O)

Who will manage the SBI-ETF Quality Fund?

The Scheme will be managed by Mr Raviprakash Sharma. He is a commerce graduate (B. Com), a Chartered Accountant, and is a CFA Charter Holder (CFA Institute, USA) with a total work experience of around 18 years in Indian capital markets in various capacities including Portfolio Management and Dealing in equity shares on behalf of clients.

For 4 years he worked as a Manager of Fixed Income Group at Birla Sun Life Securities Ltd, later for a year he joined Times Investors Services Pvt. Ltd., Mumbai as AVP of Fixed Income Group.

Thereafter, for a year-and-a-half was an AVP of Non-Discretionary PMS at Kotak Securities Ltd, followed by a short tenure as a financial advisor with Citigroup Wealth Advisors India Pvt. Ltd.

Finally, before joining the SBI Mutual Fund he worked as a Sr. Manager of Portfolio Management Services with HDFC Asset Management Co. Ltd for four years.

Presently, he is the Fund Manager of SBI Nifty Index Fund, SBI - ETF Gold, SBI-ETF SENSEX, SBI-ETF Nifty Bank, SBI-ETF BSE 100, SBI-ETF Nifty Next 50, SBI–ETF SENSEX Next 50, and SBI ETF Nifty 50.

The Outlook of the SBI-ETF Quality Fund:

As mentioned earlier, SBI-ETF Quality Fund is aligned to Nifty 200 Quality 30 index and follows a passive investment approach. The fund manager will not perform any analysis it will only try to mirror the Nifty 200 Quality 30 index. Hence the performance of the fund solely and closely linked to how the NIFTY200 Quality 30 index performs.

[Read: Skip NFOs, Instead Consider Building A Strategic Mutual Fund Portfolio]

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