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Should you invest in the Motilal Nasdaq Q50 ETF NFO?

A new ETF promises to catch nascent technology companies before they become big. Should you invest?

Should you invest in the Motilal Nasdaq Q50 ETF NFO?


08 Dec 2021 - Contact Sayan Sircar
7 mins read

A new ETF promises to catch nascent technology companies before they become big. Should you invest?

Should you invest in the Motilal Nasdaq Q50 ETF NFO?

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.

Table of Contents

Introduction

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.

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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.

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)
Price index levels Nasdaq-100 vs Nasdaq Q-50
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.

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Rolling return and risk for Nasdaq-100 vs Nasdaq Q-50

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)
Rolling risk-adjusted returns for Nasdaq-100 vs Nasdaq Q-50

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.


Goal-based-investing plan

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 Oswal’s 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)
Price NAV variation of NASDAQ 100 ETF

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)
Excess returns of NASDAQ 100 ETF

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

This article discusses options for investing in US markets in more detail: What is the best way to invest in US stocks?

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This post titled Should you invest in the Motilal Nasdaq Q50 ETF NFO? first appeared on 08 Dec 2021 at https://arthgyaan.com


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