NFO review: Aditya Birla Sun Life Nifty Healthcare ETF

On October 08, 2021, Aditya Birla Sun Life (ABSL) Mutual Fund rolled out a new fund offer (NFO) that will provide exposure to the healthcare 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, ABSL Nifty Healthcare ETF, will track the NIFTY Healthcare Index. Here the investor will get exposure to a maximum of 20 tradable, NSE listed companies engaged in the healthcare field, such as pharma, hospitals, medical devices and supplies, laboratories and diagnostics, medical insurance, etc.

The scheme will close for subscription on October 20, 2021, and will be managed by Lovelish Solanki.

About the strategy
We compared the NIFTY Healthcare Total Return Index with that of the NIFTY 50 Total Return Index to see how this strategy has worked vis-à-vis the broader market (see the chart 'The Nifty Healthcare Index vis-à-vis the Nifty 50'). Over the last decade, while the healthcare index initially outperformed the broader market with a higher degree of outperformance, the growth momentum fizzled out from 2016 to 2019. A similar trend can be seen in its long-term performance (based on five-year rolling returns), where the healthcare index turns out to be far more volatile than the mainstream Nifty 50 index. But these are historical trends, and one cannot extrapolate them to the future.

We at Value Research believe that sectoral funds are best avoided. That is because the sectoral funds are highly volatile in nature. Instead investors should look at the diversified equity funds that have allocation in different sectors. For instance, the flexi-cap funds have over 7 per cent allocation to the healthcare sector on average (as on September, 2021).

However, investors having a conviction on any particular sector can look to have a small allocation of the same in their portfolio. For instance, the pharma sector has delivered over 17 per cent returns annually over the last 10 years. The AMC believes that the sector has a high growth potential due to the increasing per-capita spending on healthcare and government spending on the same.

Healthcare-themed funds
Currently, there are 13 healthcare-oriented funds with a collective AUM of over Rs 16,400 crore spread across 11 AMCs. However, only four of them are passively managed. None of them launched more than a year back. Two of these passively managed funds - Axis Healthcare ETF and ICICI Prudential Healthcare ETF track the Nifty Healthcare Total Return Index. Since none of the passively managed funds have enough history for now, it would be too soon to comment on the ease of replicability of the index.

About the AMC
Aditya Birla Sun Life Mutual Fund offers several funds across categories in the equity space. In the actively managed equity space (excluding Fund of Funds and Index funds/ETFs), the fund house manages assets worth over Rs 96,000 crore across 25 funds and enjoys the fifth position. When it comes to the passive equity space (excluding FoFs), with an AUM of over Rs 1,100 crore, Aditya Birla Sun Life 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. The fund house currently manages four ETFs. Of these two of its ETFs, Aditya Birla Sun Life Nifty ETF and Aditya Birla Sun Life Banking ETF have this year done a fair job with a modest tracking error and good average trading volume compared to other ETFs tracking the same indices.