CPSE ETF: Book profits slowly and don't try to maximise gains, say experts

New investors are better off picking diversified offerings

The central public sector enterprise (CPSE) exchange-traded fund (ETF) has fetched a return of 35.1 per cent over the past year, handily beating the 10.12 per cent gain registered by the Nifty 50 Total Returns Index (TRI). However, investors should not rush to invest in this ETF, based on its recent performance. Instead, they should evaluate its longer-term track record.

Asset owners driving performance

To understand why the ETF has outperformed over the past year, examine its constituents.

Its largest holdings include NTPC (22.2 per cent), Power Grid Corporation (20.5 per cent), Oil and Natural Gas Corporation (17.4 per cent), Coal India (13.9 per cent), and Bharat Electronics (10.4 per cent).

The key sectors to which it has exposure are utilities (47.2 per cent), energy (34.4 per cent), and industrials (11.75 per cent).

“The CPSE ETF consists of resource companies or asset owners. In a world where supply-side is a bigger constraint, the earnings prospects of these stocks are improving. While supply shortages were there earlier as well, the start of the Russia-Ukraine war has given a shot in the arm to such companies. Therefore, these stocks are getting rerated,” says Ashutosh Bhargava, fund manager and head-equity research, Nippon India Mutual Fund (the fund house that manages the CPSE ETF).

Most of the stocks in this ETF are value-oriented and such stocks have done well over the past year.

Bhargava believes they offer sound long-term prospects.

“These stocks are in general very cheap, value-oriented, and have low institutional ownership. With the recent correction in the market, they have also corrected, providing attractive risk-reward for long-term investors,” he says.

This ETF may continue to perform for some time.

“So long as supply constraints continue within the energy sector, this ETF will do well,” says Ankur Kapur, managing partner, Plutus Capital, a Securities and Exchange Board of India (Sebi)-registered investment advisory firm.

Concentrated offering  

Most financial advisors, however, are of the view that investors should approach this ETF with caution as it carries certain risks. One is that it is based on a concentrated index. Around 93.4 per cent of the portfolio is concentrated in three sectors. The portfolio holds only 12 stocks.

“The lack of diversification has affected its performance in the past,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Sebi-registered investment advisor.

The ETF has underperformed the Nifty 50 TRI in many calendar years: 2015, 2017, 2018, 2019, and 2020.

When the energy-commodity space is out of favour, this ETF’s returns could get affected.

The ETF has also underperformed the Nifty50 Index over longer-term horizons.

“It has underperformed over the three-year and five-year horizon,” says Anup Bansal, chief investment officer, Scripbox.

He points out that it is likely to offer a more volatile ride. Over the past five years, the Nifty 50 TRI’s standard deviation was 18.7, compared to 24.8 for the CPSE ETF (Source: Morningstar AWS).

What should retail investors do

If you are an existing investor in this ETF, you should start booking profits.

“Don’t try to maximise your returns from it,” says Kapur.

This ETF has also corrected 5.3 per cent over the past month.  

With the market turning volatile, new investors will be better off going for more diversified offerings. “A Nifty 50 ETF or an S&P BSE 500 TRI-based ETF would be a better bet in the current environment,” says Kapur.

Tarun Birani, founder and chief executive officer, TBNG Capital Advisors, suggests investors should move into a diversified equity fund, such as a flexi-cap fund.

According to him, only investors who want exposure to the public sector-commodity-energy theme should invest in this ETF, but they should limit their exposure (as one does with any thematic offering).