Patient investors may stand by CPSE ETF

Those with investment horizon of 3 years may wait for turnaround, while those looking to cut losses should move to a diversified equity fund

The finance ministry is planning to launch a new Central Public Sector Enterprises (CPSE) exchange-traded fund (ETF). This is expected to have a portfolio of 10 stocks. Many feel the response to the new ETF could be muted because of the lacklustre performance of the current CPSE ETF.

Retail investors in Goldman Sachs’ CPSE ETF wouldn’t be too happy with the return of -22.29 per cent in the past one year. In comparison, the Nifty 50 index has given a return of -7.99 per cent. Even if an investor had entered the ETF at the time of launch and received loyalty bonus–one unit for every 15 units held–a year later in addition to the five per cent discount at the time of launch, the person’s returns wouldn’t have beaten the Nifty. In the past two years, since the fund’s launch, the Nifty has given a return of 16.75 per cent. The CPSE ETF is in the negative zone with a return of -0.49 per cent, according to data from Value Research.

However, the scheme has outperformed its benchmark index – the CPSE index. In the past year, the

CPSE index has been down -28.71 per cent whereas the CPSE ETF has fallen -22.29 per cent.

The fund had raised Rs 3,000 crore in March 2014. But because of the ETF’s poor performance, asset under management has now shrunk to Rs 1,917 crore.

“The concept of CPSE ETF was brilliant but it backfired because of the crash in energy prices,” says Arun Kejriwal, director at Kris Research. The ETF is skewed towards energy, which comprises around 70 per cent of the portfolio. ONGC, Coal India, Indian Oil and GAIL India are some of its key holdings. The remaining six stocks are Oil India, Power Finance Corp, Rural Electrification Corp, Container Corp, Engineers India and Bharat Electronics. “The performance of the existing CPSE ETF may discourage investors from looking at similar schemes in the future unless the government comes up with a well-diversified portfolio – one that is not skewed towards a single sector,” says Kejriwal.

Existing investors may cut their losses and put the money in diversified- equity funds. “Energy is an extremely complex sector for investors to understand and be able to take a view on the future performance the ETF. It would be better if they looked for something simpler and more diversified,” says Kejriwal.

According to Sanjeev Bhasin, executive vice president at IIFL, investors should take a view on this ETF depending on their outlook on the broader market. “If they are positive for the next three years, they should stick to their investments in this ETF. Most of these large-cap stocks have been underperformers and are available at extremely cheap valuations. When the bull run starts, they will be the first to benefit,” says Bhasin.

With the management of the fund house changing – Reliance Mutual Fund has agreed to buy Goldman Sachs Asset Management – investors might have more choice within the new house to shift their money. After the merger, investors who wish to exit the ETF can do so seamlessly as they will not incur any charges for switching over to any of Reliance MF's schemes. Even if they want to exit it now, they can do so without any exit load.

In 2014, the Goldman Sachs CPSE ETF was launched with much fanfare. The government used this route to disinvest its share in the PSUs. It offered retail investors to participate in equity markets by investing in a basket of top-rated public sector undertakings. It also allowed tax exemption as the ETF was eligible under the Rajiv Gandhi Equity Savings Scheme.