On August 30, Axis Mutual Fund rolled out a new fund offer (NFO) that will provide exposure to the consumption theme in an ETF (exchange-traded fund) format. An ETF structure tracks the performance of an index by closely replicating the portfolio of the underlying index. The newbie, Axis Consumption ETF, will track the NIFTY India Consumption Index. Here the investor will get exposure to 30 largest consumption-oriented companies by the free-float market cap. This group is spread across sectors like consumer non-durables, healthcare, auto, telecom services, pharmaceuticals, hotels, media & entertainment, etc.
According to the fund house, the potential of passive investing in India has gained momentum and seems likely to stay. Given the ETF structure, the fund will ensure low costs without the risk of security selection.
The scheme will close for subscription on September 13 and will be managed by Deepak Agrawal and Viresh Joshi.
Insights into the consumption theme
We compared the NIFTY Consumption TRI with that of the NIFTY 50 TRI to see how this strategy has worked vis-à-vis the broader market (see the chart 'The Nifty Consumption Index vis-à-vis the Nifty 50'). Over the last decade, while the consumption index initially outperformed the broader market with a higher degree of outperformance, the growth momentum has fizzled out somewhat in the last three-four years. This commensurate with its long-term performance (based on five-year rolling returns) which has been much more muted. But these are historical trends and one cannot extrapolate them to the future.
Having said that, according to the AMC, India's growth story is likely to remain pretty strong for the next decade on the back of favourable demographics, globalisation, reforms and digitisation and a key beneficiary of this growth is consumption.
In terms of market-cap exposure, the composition of the index is primarily large cap. As for the sectoral composition, what you get here is a portfolio with significant exposure to the consumer-good sector (around 58 per cent exposure). And together, the consumer-good sector and automobile comprise about 75 per cent of the index. This is based on the sectoral distribution as per NSE.
At present, there are 13 consumption-oriented funds with a collective AUM of over Rs 9, 200 crore spread across 11 AMCs. Of them, nine track the NIFTY India Consumption Index. However, only two of them are passively managed, with one being a fairly new launch. The one ETF that has a reasonable history is offered by Nippon.
To get a sense of the replicability of this index, we compared the Nippon ETF tracking error with that of other ETFs tracking the Nifty 50 TRI. With a tracking error of 0.13 per cent in a one-year period, the tracking error of Nippon fund seems fairly comparable with the average tracking error of 0.10 per cent of other ETFs that track the Nifty 50 TRI. This suggests that replicability doesn't seem to be an issue. Although the Nippon fund we analysed is pretty small in size, replicability doesn't pose a major challenge even with a large asset base, given the large-cap composition of the index.
About the AMC
Axis has built a very strong reputation in the actively managed equity space by following the growth strategy. With over Rs 1,17,000 crore of actively managed equity assets (excluding Fund of Funds and Index funds/ETFs) spread across a basket of 10 funds, the AMC enjoys the number two position. When it comes to the passive space in equity, with an AUM of over Rs 640 crore of passively managed equity assets, Axis ranks 10th among the 25 AMCs that currently have passive equity bouquet.
When it comes to the ETF line-up of the AMC, it is a far cry from the kind of money it manages in the active space. Most of these ETFs are fairly new, so they don't have a pretty long track record. The fund where sufficient history is available - Axis Nifty ETF, the AMC has been doing a fair job, given its modest tracking error as against that of other ETFs tracking the same index.