A new ETF promises to catch nascent technology companies before they become big. Should you invest?
Catching them young is an enticing thought: Imagine investing in Apple, Wipro, Reliance, Amazon and Tesla before they became the giants of today. There are some pitfalls with the approach though: smaller companies with a lot of potential have a high risk of not going bust and not making it big as well. We will discuss these aspects below.
Motilal Oswal AMC has launched Motilal Nasdaq Q50 ETF whose NFO period is 10-17 Dec, 2021. This is the filing with SEBI that investors should read and understand in detail as per their due diligence. This mutual fund will be an exchange traded fund (ETF) that will directly buy the underlying stocks of the Nasdaq Q-50 index. This is not a feeder fund.
As per the SID of the fund (linked above), this product is suitable for investors who are seeking
Return that corresponds to the performance of the NASDAQ Q-50 TR Index subject to tracking error and forex movement.
We need to immediately ask this question: why should investors seek returns similar to the Q-50 index and not, say, the Nasdaq-100? We discuss this point below.
What is the Nasdaq Q-50 Index?
From the Nasdaq website:
Nasdaq Q-50 is a market capitalization-weighted index launched on October 10, 2007 with a base value of 150. Nasdaq Q-50 Index is home to the most eligible securities likely to make their way into the Nasdaq-100 Index over time.
Investors will recognise the similarity with the Nifty Next 50 Index in India where stocks which exceed the market capitalization limits of the Next 50 index end up in the Nifty 50. The premise of such indices is that stocks in the index will pop in valuation when they edge towards inclusion in the parent index. The ETF, by design, wants to replicate the performance the Q-50 index, and not those stocks that are becoming eligible for Nasdaq-100 inclusion. A simple test of whether investors should consider investing in the Q-50 index is to check how it performs against the Nasdaq-100. This is because Nasdaq-100 based funds and ETFs already exist in India.
Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.
Performance of Q-50 vs Nasdaq-100
We will use data from Nasdaq.com to compute price returns since December 2011, the time for which data is available.
Point-to-point returns
(click to open in a new tab)
Date
Nasdaq Q-50
Nasdaq-100
1m
-8.9%
-3.0%
6m
5.1%
15.5%
1y
10.0%
25.8%
2y CAGR
25.8%
37.7%
3y CAGR
24.9%
33.8%
5y CAGR
18.4%
26.7%
10y CAGR
17.7%
21.2%
We see that there is consistent out performance of the Nasdaq-100 vs the Q-50 for all time intervals under review.
Rolling returns
We now move on to rolling returns to check the trend in performance, since a fixed window of point-to-point returns can be used to draw any conclusion.
(click to open in a new tab)
While the charts do not show it explicitly, averages of one year rolling return and risk are superior for the Nasdaq-100 vs. the Q-50.
We will show risk-adjusted returns by dividing the rolling return by risk and plot the same. Risk-adjusted returns provide a check of choosing one asset over another since it shows the benefit i.e. the return per unit of the risk that is being taken.
(click to open in a new tab)
We see that over time, the risk-adjusted return of the Q-50 has fallen to below that of the Nasdaq-100 demonstrating that over time, there is gradually reducing benefit of investing in the Q-50 vs the Nasdaq-100.
Based on the analysis presented above, there is no benefit in investing in the Nasdaq Q-50 index over the Nasdaq 100. If investors require exposure to US technology and related sectors, Nasdaq-100 is a better option.
Implications of ETF structure
Since this ETF does not exist yet, we will examine what the AMC has been doing with the Nasdaq-100 ETF which has been running since 2011. The logic here is to examine the track record of managing a direct US stock ETF.
Price/NAV variation
The ETF, like Motilal Oswalâs Nasdaq-100 ETF, will directly buy the underlying stocks. The difficulty of maintaining ETF price close to the NAV is given by the following chart of the Nasdaq-100 ETF since 2011.
(click to open in a new tab)
Investors should be mindful of significant price/NAV variations when they are buying the ETF. As a rule, buys and sells will need to happen close to the iNAV published by the AMC on near real-time basis during market hours.
Tracking error
We are comparing how well the AMC manages direct US stock-based ETFs instead of comparing one ETF with each other. Hence, instead of using tracking error (standard deviation of excess returns), we will simply calculate excess returns i.e ETF NAV vs. Index level in INR for the Nasdaq-100 ETF as rolling 1 year returns.
(click to open in a new tab)
We see that the ETF has consistently underperformed the Nasdaq-100 INR index and investors should be mindful of this if they want to invest in a similar ETF of the same AMC.
Should you invest in Motilal Nasdaq Q50 ETF?
The standard recommendation regarding NFO investment is
invest only if there is a niche that existing funds do not serve. This fund fills a possible niche of upcoming technology stocks. However there is no data that there is any benefit of investing in this index vs the Nasdaq-100
wait until the NFO is over and the fund opens for the standard subscription so that the fund expenses are known
at least a few months of NAV history is available so that tracking error and alpha can be estimated
In summary, investors should avoid:
investing in the Nasdaq Q-50 index since it has lower return and higher risk compared to the Nasdaq-100
investing in this ETF because of how the Nasdaq-100 ETF has performed so far
investing in this NFO since there is no benefit of not waiting until more data is available
What's next? You can join the Arthgyaan WhatsApp community
You can stay updated on our latest content and learn about our webinars.
Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.
To understand how this article can help you:
If you have a comment or question about this article
The following button will open a form with the link of this page populated for context:
If you liked this article, please leave us a rating
This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
Previous and next articles:
LoansReal EstateHouse Purchase
Should you stretch to buy your dream home?
What do you do if your dream house is above your budget? How to know if you can stretch?
Published: 7 December 2021
7 MIN READ
Portfolio Construction
Can debt funds beat inflation?
Many investors have a need where they want the safety of assured returns and wish to beat inflation simultaneously. Can debt funds do that?
Published: 9 December 2021
6 MIN READ
Latest articles:
Portfolio Construction
Which stage of your career is most important for wealth creation?
This article looks at the various stages of your career from the perspective of maximum wealth creation.
Published: 17 April 2024
4 MIN READ
NewsTax
When should you verify your Income Tax return as per the new rules effective from 1st April 2024?
This article explains the new rules regarding income tax return verification which are now in place for tax returns to be filed 1st April 2024 onwards.
Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled Should you invest in the Motilal Nasdaq Q50 ETF NFO? first appeared on 08 Dec 2021 at https://arthgyaan.com
