Thematic investing seeks to tap future trends and hence aids in wealth creation, says Swarup Mohanty of Mirae Asset Mutual Fund. We also speak to him about smart-beta ETFs, the newly launched Mirae Asset NYSE FANG+ ETF and how investors should approach ETF investing.
What role do thematic ETFs play in one's portfolio?
Thematic investing is a forward-looking investment approach, which attempts to capture future trends. It seeks to embrace the changes we anticipate happening in the world. It is often touted as investing for your future by investing in the future. It plays the following role in one's portfolio:
- Opportunity to take focused exposure in a secular theme like consumption or emerging themes like electric vehicles, e-commerce, etc.
- Thematic investing focuses on a selection of stocks to capitalise on a future growth trend. Selecting a few companies involved in internet of things, blockchain or renewable energy, for example, could yield huge results should those industries develop as expected.
- Thematic-investing strategies are also highly customisable and can vary significantly based on an investor's preferences. While thematic funds are highly concentrated, investors can still achieve diversification by building portfolios based on more than one theme.
What are your views on smart-beta ETFs? Amid the active-vs-passive debate, do you think that the smart-beta strategy will gain investor interest?
Smart beta refers to an indexing strategy which seeks to use certain well-researched factors to select stocks and weigh stocks in order to create an index portfolio. The idea is to move away from a plain-vanilla index, where allocation of assets is simply based on market cap, and use some intelligent factors or scheme to select and allocate the money in supposedly a smarter manner.
What was once perceived to be a source of alpha is now being converted into a smart-beta index product that you can invest in or track using a low-cost product such as ETFs. By such an investment, investors get an opportunity to avoid the fund-manager risk, along with continuing to keep exposure intact to some of the factors that the investor is keen on. Smart-beta ETFs may lead to a portfolio with a more-targeted risk-and-return profile and behaviour (consider low-volatility investing or momentum investing) than what traditional investing provides. The strategies involved still passively follow indices but take things like value, liquidity, quality and momentum into consideration.
Smart-beta ETFs have already gained popular momentum across the globe. As at the end of June 2021, there were 1,325 smart-beta equity ETFs/ETPs (exchange-traded products), managing assets of $1.24 trillion (almost 14 per cent of the total ETF market). In the last five years, the total AUM under smart-beta ETFs has grown at a CAGR of 22.8 per cent per annum. However, in India's context currently, since the overall ETF space is still evolving, smart-beta strategy ETFs are at the very minimal and are expected to grow in the coming years, just like they have evolved elsewhere in global markets.
One invests in mutual funds because one doesn't want to take active calls on stocks/sectors. However, with sectoral/thematic funds and ETFs, the decision to invest in a particular sector/theme is left in the hands of investors. Do you think that these funds make sense for investors, especially the ones who do not have much knowledge of the market?
Portfolio construction generally should imbibe the policy of following core and satellite portfolio strategy or approach. Broad-based sectoral diversified mutual funds or ETFs are an excellent tool for building strategic asset allocation.
Sectoral/thematic funds or ETFs can play an important role in deciding your satellite-portfolio strategy. For instance, if you are an active investor, you can form your core portfolio via active funds and you can use sectorial/thematic ETFs as a satellite portfolio.
You can also use ETFs tracking specific sectors to add to your portfolio if you want to take a tactical call or for that matter, if a particular sector is under-represented in your fund manager's portfolio. For instance, if your active fund portfolio is currently under-representing a particular sector that you believe might do well, in such a case, you can take exposure to such a sector via ETFs.
Also, long-term structural and mega-trend themes that are shaping our lives, such as ESG, technological advancement, healthcare and genomic revolution, etc., can be tracked using ETFs/funds, hence aiding your asset-allocation strategies.
ETFs are considered a great tool to diversify globally. You have also recently launched an NYSE FANG+ ETF, which invests in top 10 tech names. Does it not add concentration risk in terms of the number of securities and sector?
The intent of the fund is to provide focused and concentrated exposure to these 10 big tech companies. Although on the face of it, it looks like you are investing in merely 10 names but these 10 companies are engaged in multiple line of businesses. For instance, since their inception, these companies have acquired/invested in 1,000+ companies representing different businesses, segments and opportunities. Globally, there are only a handful of companies which are leaders in their respective domain and are also investing significantly in both R&D and external investments to grow their portfolio of products and services.
Further, Since the index tracks performance of only 10 stocks, it is equal-weighted in order to provide diversification to mitigate risk arising from concentration towards few stocks. Generally, when a portfolio is tracking the performance of a limited number of stocks, it is prudent to use equal-weighing as opposed to, let's say, market-cap weighing to ensure increased diversification and capture the performance of each stock in a focused portfolio.
Historically, we have seen that the FANG+ index has higher volatility vis-à-vis Nifty 50 and NASDAQ 100, but for each unit of risk, it has compensated investors well enough.
The most-traded ETFs in India are the ones that track the major indices such as the Nifty and the Sensex. Do you believe that there may be a liquidity constraint that sectoral or smart-beta ETFs may face? Will this also cause an issue in the efficient tracking of the underlying indices?
First and foremost, there are two ways of buying an ETF. One is through the exchange, where you can buy as small as one unit. The other way is through the AMC, where you can buy only in specific lots (creation unit). The second method is generally adopted by large or institutional investors.
Buying ETFs on an exchange is similar to buying stocks, with certain things to keep in mind such as when you buy through the exchange, check the order book and also check the price quoted on the exchange with the indicative NAV (I-NAV) published on AMC's website. I-NAV will help you in knowing whether you are buying it at right price or not on the exchange as I-NAVs are the real-time price of the portfolio, excluding any transaction charges.
As far as liquidity is concerned, an ETF can be as liquid as its underlying constituents. In case of the Nifty 50 or Sensex 30, you generally don't find liquidity as constraints because the underlying stocks are also liquid and hence track the indices efficiently. Similarly, the liquidity of sectoral or smart-beta ETFs will depend upon the underlying of such indices and relatively, the tracking error in such cases may be slightly higher than that in normal broad-based indices.
Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully.
All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF).
For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Center section available on the website of Mirae Asset Mutual Fund.