Public sector ETF a good option

Retail investors should note it comprises profitable stocks, reasonably valued

One can paint a not-so-rosy picture of public sector units’ (PSUs) stocks. With absolute returns of only 15.6 per cent over the past five years, the NSE public sector enterprises index has underperformed the benchmark Nifty-50 at 132.4 per cent drastically. The numbers get worse over a three-year and one-year period, where the  NSE PSE index returns are negative.

But are these enough reason to ignore the Goldman Sachs-managed Central Public Sector Enterprises (CPSE) exchange-traded new fund offer launched on Wednesday? The answer is no.   

One good reason is the five per cent discount. And, if you hold on to the ETF for a year, there will be a bonus of one unit for every 15, an additional 6.6 per cent benefit. Coupled, these two add to almost a 12 per cent benefit.  

According to Feroze Aziz, director and head, investment products, at Anand Rathi Private Wealth Management: “The discount brings down the risk of the thematic fund in case there is a fall in the prices of the stocks.”

There are additional reasons. The stocks comprising the index are good ones, with a low price to earnings (PE) ratio and with high dividend yield. As of March 13, the CPSE index had a PE ratio of 10.52 and dividend yield of 3.51 per cent. In addition, the ETF comprises stocks that are profitable. And, most of these are available at cheap valuations, say analysts. The stocks that make up the ETF are Oil and Natural Gas Corporation, GAIL, Coal India, Rural Electrification Corporation, Oil India, Power Finance, Engineers India, Container Corporation, Indian Oil Corporation and Bharat Electronics. In all, 59.35 percent of the ETF will comprise oil and gas stocks, which are seeing price increases.

For retail investors, the minimum investment is Rs 5,000 and the maximum is Rs 2 lakh. It will be listed on the stock exchanges before April. But if you invest after the NFO, the discount and loyalty bonus will not be available to you.

There is no entry and exit load. Besides, the CPSE ETF is eligible for tax exemption under the Rajiv Gandhi Equity Savings Scheme. The scheme is open-ended, allowing exit once it is listed. “Retail investors must take comfort from the fact that most of the top mutual funds have these stocks in their holding. Also, most of the brokerages have either put out a ‘buy’ or ‘hold’ recommendation on these stocks,’’ Aziz says.  The flipside is there could be a correction in these stocks. For instance,if  the prices of these PSU stocks correct between now and the day of listing by around five per cent, the discount offered to investors will get negated. To insulate yourself from such shocks, Swapnil Pawar, CIO, Karvy Capital, says the ETF is a good option but stay invested for at least two to three years.