NFO review: DSP Nifty 50 Equal Weight ETF, Indiaâ€™s First ETF based on equal weight strategy
DSP Investment Managers has announced the launch of DSP Nifty 50 Equal Weight ETF, Indiaâ€™s First Exchange Traded Fund based on the Nifty 50 Equal Weight Index. The New Fund Offer (NFO) opens for subscription on October 18th and closes on October 29th, after which it will be purchased and sold on the exchanges.
What is equal weight index
In an equal weight index, each stock in it gets equal weight. Thus, if the strategy is applied to Nifty 50, the equal weighted index will own the same 50 companies as Nifty 50 and will have 2% weight to each company unlike the current market cap weight design where some stocks get large weights like 9-10% and many stocks in the lower tail get only 0.3%. This gives all companies in the index an equal chance to contribute to returns rather than being overly dependent on the top 10.
Why DSP Equal Nifty 50 ETF
The DSP Equal Nifty 50 ETF, owing to its methodology, aims to provide better sector and stock diversification compared to Nifty 50 Index.
The top 10 stocks accounted for nearly 60% of the weightage of the Nifty 50 index as on September 30, 2021 compared to only around 20% of the Nifty 50 Equal Weighted Index.
The Nifty 50 Equal Weighted Index has outperformed the Nifty 50 index by 2.02% CAGR since inception and has outperformed the Nifty 50 Index in 12 out of 21 calendar years.
The DSP Equal Nifty 50 ETF follows two core investment principles – investing in sector leaders that can ride through market cycles along with better diversification across companies and sectors with equal stock weights that offer lower stock specific risks and lower sector concentration compared to the Nifty.
Apart from a diversified portfolio at a relatively lower cost, the Nifty 50 Equal Weight ETF offers the advantage of simplicity of buying and real time trading.
The Equal Weight Index gets rebalanced on a quarterly basis. Owing to this quarterly rebalancing method, an equal weight portfolio has a built-in profit booking mechanism, in effect buying the underperformers at â€œlowâ€ and selling the outperformers at â€œhighâ€.
An ETF offers 4 advantages.
1) Investing in ETFs is as simple as buying-selling any other stock on the exchange.
2) ETFs allow you to take benefit of intraday movements in the market, which is not possible with open-ended Funds.
3) The cost of investing in ETFs is generally lower than an active fund invested in the same market of assets.
4) Holdings published daily in ETFs, so you always know exactly what is owned.
â€œWhen we studied this concept of equal weight indices globally, we noticed that over long periods equal weighting tends to earn better returns than market cap weighted indices. This happens as all the companies get chance to participate rather than just the top few. Such a strategy has its phase of underperformance when economyâ€™s profits are polarised to select companies like in recent five years. However, over the long term as good companies across sectors grow and create value, an equal weight strategy gives meaningful weight to each company in the index. Equal weighting also ensures that the most over owned sector at any time is de risked,â€ says Kalpen Parekh, MD & CEO, DSP Investment Managers.
â€œEqual weighting takes advantage of certain market inefficiencies caused by behaviour biases, since the strategy is not affected by the over-optimism in certain stocks and over-pessimism in others. Such inefficiencies have helped equal weight index strategy to outshine traditional market cap based index strategies,â€ says Anil Ghelani, CFA, Head â€“ Passive Investments & Products, DSP Investment Managers.