Stellar performance of the CPSE ETFs in the recent times. Should you invest?

CPSE ETF would replicate the Nifty CPSE index and would invest in the index constituents in the same proportion as that of the index. The performance however may vary from the underlying index due to tracking error.

Stellar performance of the CPSE ETFs in the recent times. Should you invest?

The impressive performance of the central public sector enterprises (CPSE) exchange traded fund (ETF) is making the headlines in the recent times. The CPSE ETF has returned 54% in the one year ended April 29, 2022 as against gains of 54% by its benchmark Nifty CPSE total return index (TRI) and 18% by the equity market benchmark Nifty 50 TRI in the same period. While the past performance is not indicative of the future results, CPSE ETFs offers an opportunity to invest in Navratna and Maharatna public sector undertakings (PSUs) owned by the Central Government. Managed by Nippon Life India Asset Management, this ETF enables investors to take exposure in PSU stocks which has rallied sharply in last one year. The S&P BSE PSU index advanced 31% in the one year ended April 29, 2022.  Let us understand more about CPSE ETFs, reasons to invest and risk factors to be cautious about before investing.

Features and key merits of investing in the CPSE ETF  

CPSE ETF would replicate the Nifty CPSE index and would invest in the index constituents in the same proportion as that of the index. The performance however may vary from the underlying index due to tracking error. The portfolio has 12 CPSE companies and is inclined towards sectors such as power, oil, minerals/mining as seen in the chart below. The top 5 stock holding accounts for 84% of the portfolio with highest exposure to companies such as Power Grid Corporation of India Ltd., NTPC Ltd., Oil & Natural Gas Corporation Ltd. (ONGC), Coal India Ltd., Bharat Electronics Ltd. and NMDC Ltd.  

Sector and company allocation as on March 31, 2022

 Merits:

  • A single unit of the CPSE ETF provides opportunity to diversify across 12 stocks of the CPSE as seen in the chart above.
  • ETF units are traded on the exchange and units can be bought and sold on the exchange during trading hours
  • Instead of individual investment in the PSU stocks which requires huge ticket size and subjected to higher risk, CPSE ETF allows to invest in well diversified portfolio and participate in the India growth story via investment in the PSUs. The performance of the PSU stocks has been encouraging in the recent times thanks to the persistent endeavor by the government to boost their efficiency. Investment through CPSE ETF allows investor to reap the benefit from the revival of this segment.
  • The dividend yield of the Nifty CPSE index is better as compared to broader market index. Nifty CPSE index dividend yield is 5.76 compared to 1.17 of Nifty 50 as on April 28, 2022. In terms of valuation, Nifty CPSE index price to earnings ratio is around 7x as on April 28, 2022 which is quite attractive compared to Nifty 50 (22.20).
  • Investment in CPSE ETF also provides tax benefit under Section 80C of the Income Tax Act similar to exemptions available Equity Linked Savings Scheme(ELSS). Budget 2019 extended Section 80C benefit i.e., investment up to Rs 1.5 lakh per financial year to investment in CPSE ETF.

Key benefits of investing in CPSE ETFs

Be cautious about the risk factors associated with CPSE ETF

The striking performance and other benefits of the CPSE ETFs can entice investors but CPSE ETFs like other mutual fund schemes are subject to market risk. The volatility in the equity market and the underlying PSU stocks can impact the performance of these passively managed funds. The portfolio of the CPSE ETF is concentrated highly in the energy stocks; volatility in these stocks tend to impact the fund performance.  

Summing up

PSUs have delivered encouraging performance in the recent times thanks to the economic recovery, rising commodity prices and government focus on strategic disinvestments and improving efficiency of the PSUs.  These stocks are also trading at cheaper valuations but this segment goes through phases of strong earnings growth as well as contraction depending on the cycle the business is in. Hence, subjected to period of higher volatility and investors should avoid parking huge amount of lump sum money in these ETFs in a bid to capture superior returns.  Systematic investments in smaller portion are better medium to invest in these funds as it can aid to negate the volatility and capture the upside potential.