Analysis: the CPSE ETF has doubled in one year: should you invest?
This article explores the CPSE Index and the ETF tracking it to determine its suitability for your investment portfolio.
Analysis: the CPSE ETF has doubled in one year: should you invest?
Posted on 12 May 2024
Author: Sayan Sircar
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5 mins read
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This article explores the CPSE Index and the ETF tracking it to determine its suitability for your investment portfolio.
📚 Topics covered:
- What is the CPSE ETF?
- What Makes the CPSE ETF Unique?
- Performance of the CPSE ETF
- Ideal Investors for the CPSE ETF
- Who Should Avoid This ETF?
What is the CPSE ETF?
Launched in Mar-2014 by Nippon India AMC, the CPSE ETF tracks the Nifty CPSE Index. The Nifty CPSE Index was developed to support the Government of India’s initiative to divest stakes in certain Central Public Sector Enterprises (CPSEs) via the ETF route.
In essence:
- The government aimed to reduce its stake in these companies without directly selling the shares.
- These shares were grouped into an ETF, which is now traded on the NSE and BSE.
- NSE created the CPSE Index to serve as a benchmark for this ETF.
What Makes the CPSE ETF Unique?
The ETF includes stocks selected by the Department of Disinvestment to meet specific criteria. According to the Apr 2024 factsheet, the Nifty CPSE Index comprises:
| Company | ETF Weight |
|---|---|
| NTPC Ltd. | 20.23% |
| Power Grid Corporation of India Ltd. | 19.80% |
| Oil & Natural Gas Corporation Ltd. | 17.15% |
| Coal India Ltd. | 16.10% |
| Bharat Electronics Ltd. | 13.02% |
| NHPC Ltd. | 4.66% |
| Oil India Ltd. | 3.45% |
| NBCC (India) Ltd. | 1.49% |
| SJVN Ltd. | 1.48% |
| Cochin Shipyard Ltd. | 1.44% |
The primary sectors covered by the ETF are:
| Sector | ETF Weight |
|---|---|
| Power | 47.36% |
| Oil, Gas & Consumable Fuels | 36.70% |
| Capital Goods | 14.45% |
| Construction | 1.49% |
From an investment perspective, over 86% of the ETF’s value is concentrated in five stocks: NTPC, Power Grid, ONGC, Coal India, and Bharat Electronics. The performance of these stocks significantly influences the ETF’s overall performance.
Performance of the CPSE ETF
The annual returns of the CPSE ETF vary significantly depending on the year. Notably, PSU stocks, including those within this ETF, have seen considerable fluctuations, with significant recoveries following low-performing years in 2018 through 2020.
Ideal Investors for the CPSE ETF
Investors might consider allocating a portion of their equity portfolio to this ETF if they:
- Have a reasoned belief or thesis explaining the recent upward trend of PSU stocks since 2021 after a period of underperformance.
- Understand the thematic nature of the fund and acknowledge the arbitrary selection of CPSE stocks.
- Possess a solid investment thesis for each of the major stocks in the CPSE Index, backed by a fundamental analysis projecting the next 5-10 years.
- Already maintain a diversified core portfolio and are looking to tactically allocate a portion to CPSE stocks.
- Understand that this rally might soon run out of steam and the best time to invest is already past.
Investors who meet these criteria are likely to already have substantial investments in this ETF or its constituent stocks.
Who Should Avoid This ETF?
| Year | Year-end NAV | Yearly return | CAGR since inception |
|---|---|---|---|
| Inception | 17.33 | – | – |
| 2014 | 25.01 | 44% | 61.91% |
| 2015 | 21.49 | -14% | 12.99% |
| 2016 | 25.25 | 17% | 14.59% |
| 2017 | 30.18 | 20% | 15.89% |
| 2018 | 24.41 | -19% | 7.46% |
| 2019 | 23.46 | -4% | 5.40% |
| 2020 | 20.36 | -13% | 2.41% |
| 2021 | 29.68 | 46% | 7.18% |
| 2022 | 38.06 | 28% | 9.39% |
| 2023 | 66.88 | 76% | 14.84% |
| 2024# | 83.76 | 25% | 16.85% |
(# 2024 NAV is for 9 May)
Investors should consider avoiding this ETF if they:
- Only became interested in this ETF after the 2021 PSU stock rally.
- Lack experience with market cycles beyond the COVID-19 crash in 2020.
- Are comfortable with the fact that the ETF took 8 years to double (2014-2022) and then again doubled in two years. This investor does not understand that such impressive feats require a very strong investment thesis which is lacking here.
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This post titled Analysis: the CPSE ETF has doubled in one year: should you invest? first appeared on 12 May 2024 at https://arthgyaan.com
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