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This year, the BSE Sensex has outperformed the National Stock Exchange (NSE) Nifty, thanks to lower exposure to banks and financials. The 30-stock index rose 5.8 per cent since the beginning of January, against a 3.2 per rise in the Nifty.
This translated into higher gains for those who invested in Sensex-based exchange-traded funds (ETFs) compared to those who invested in Nifty-based ETFs. The Kotak Sensex ETF, for instance, rose 5.2 per cent this year, against a 2.7 per cent increase in the net asset value of the Kotak Nifty ETF during the same period. The divergence was largely due to a difference in the sectoral composition of the two indices.
“Indices are nothing but the sum of the individual stocks and the divergence in their share prices impacts the index performance. The Nifty has higher exposure to financials than Sensex, while the latter has relatively higher exposure to fast-moving consumer goods, information technology and auto companies, which have outperformed the market this year,” a wealth fund manager with a brokerage house said, requesting anonymity.
At the beginning of the year, banks and financials had 28 per cent weightage in the Nifty, against 26 per cent in the Sensex. As the sector underperformed, it weighed down the Nifty more than the Sensex. Bank Nifty, the index of India’s top banks, has fallen 12.5 per cent since the beginning of the year.
Both indices used the market value of non-promoter shareholding in a constituent stock to arrive at the weightage in the index.
This translated into higher gains for those who invested in Sensex-based exchange-traded funds (ETFs) compared to those who invested in Nifty-based ETFs. The Kotak Sensex ETF, for instance, rose 5.2 per cent this year, against a 2.7 per cent increase in the net asset value of the Kotak Nifty ETF during the same period. The divergence was largely due to a difference in the sectoral composition of the two indices.
“Indices are nothing but the sum of the individual stocks and the divergence in their share prices impacts the index performance. The Nifty has higher exposure to financials than Sensex, while the latter has relatively higher exposure to fast-moving consumer goods, information technology and auto companies, which have outperformed the market this year,” a wealth fund manager with a brokerage house said, requesting anonymity.
At the beginning of the year, banks and financials had 28 per cent weightage in the Nifty, against 26 per cent in the Sensex. As the sector underperformed, it weighed down the Nifty more than the Sensex. Bank Nifty, the index of India’s top banks, has fallen 12.5 per cent since the beginning of the year.
Both indices used the market value of non-promoter shareholding in a constituent stock to arrive at the weightage in the index.
Analysts say the Sensex may run out of luck next year, as it increases its exposure to banks. On December 23, Axis Bank will replace Jindal Steel and Power in the index. Following that, banks and financials will have 24.2 per cent weightage in the index, just a tad lower than the sector's 24.8 per cent weightage in the Nifty. Currently, the sector accounts for 22.6 per cent in the Sensex. The calculation is based on Axis Bank's current market capitalisation and free-float (non-promoter shareholding). Other financial stocks in the index include State Bank of India, HDFC, HDFC Bank and ICICI Bank. The Nifty 50 include seven banks and two non-banking financial companies. These include Punjab National Bank, Bank of Baroda, IDFC, IndusInd Bank and Kotak Mahindra Bank.
“A rise in the weightage of banks & financials in the Sensex will bring its performance closer to that of the Nifty. It will also make the Sensex more volatile, as banks are interest rate-sensitive and their share prices tend to be more volatile than companies from the manufacturing and services sectors,” says Dhananjay Sinha, co-head (institutional equity), Emkay Global Financial Services. The Sensex may, however, continue to outperform the Nifty due to lower weightage of public sector banks, he says. “The Nifty has three public sector banks, while the Sensex's exposure is restricted to State Bank of India. As private sector banks are likely to outperform their public sector counterparts, the Sensex could rise faster than the Nifty,” he says.
On the downside, the Sensex provides lower sectoral coverage than the Nifty. For instance, currently, the Sensex has no exposure to cement and real estate. Together, these two sectors have 3.2 per cent weightage in the Nifty. Overall, Sensex 30 companies account for 83 per cent of the Nifty 50 companies’ current combined market value. This raises the possibility of the latter outperforming the former if one of the smaller companies sees a sharp rise in the short term.
Many say index composition is a non-issue for most traders and investors. “Most of the traders I know buy and sell Nifty derivatives because that market is more liquid, which lowers transaction costs,” says Devang Mehta, senior vice-president and head (equities), Anand Rathi Financial Services.
