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NFO review: ICICI Prudential Consumption ETF

The newest addition to ICICI Prudential's sector/thematic ETF product basket is a consumption-based one. Here are its details.

NFO review: ICICI Prudential Consumption ETF

The fund industry has seen a rush of new fund launches in the passive equity space. Since August, the industry has seen about 10 new passive fund launches on the equity side in about the last three months. The latest entrant is ICICI Prudential Consumption ETF. Exchange-traded funds (ETFs) are passively managed mutual funds that track a benchmark index and are listed and traded on a stock exchange.

This open-end ETF will track Nifty India Consumption Index and is open for subscription from 18th to 25th October. The fund aims to provide returns that closely correspond to the total return of the underlying index, subject to tracking errors. The new offering will provide exposure to companies representing domestic consumption sectors such as Consumer Non-durables, Healthcare, Auto, Hotels, etc. The Scheme will be managed by Kayzad Eghlim and Nishit Patel.

About the strategy
To see how the strategy has fared on the performance metric relative to the broader market, we compared the NIFTY Consumption TRI with that of the NIFTY 50 TRI (see the chart 'The Nifty Consumption Index vis-à-vis the Nifty 50').

A look at the calendar year returns over the last decade shows that while the consumption index outperformed the broader market with a higher degree of outperformance in the initial years, the trend seems to have inverted in three out of the last four years. This reflects in its long-term performance (based on five-year rolling returns) as well, which has been relatively subdued. But all these are historical trends, and one cannot extrapolate them to predict the future.

Having said that, the AMC believes that with India being one of the fastest-growing economies, there is enormous potential for growth across the household and industrial consumption segments.

In terms of market-cap exposure, the index is quite large-cap heavy. As for the sectoral composition, what you get here is a portfolio with significant exposure to the consumer-goods sector (around 58 per cent exposure). This, combined with automobiles, makes up about 75 per cent of the index, thus making it quite concentrated sector-wise.

Consumption-themed funds
At present, there are 14 consumption-oriented funds with a collective AUM of close to Rs 9,990 crore spread across 12 AMCs. Of them, 11 track the NIFTY India Consumption Index. However, only three of them are passively managed, with two being fairly new launches. 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 India ETF Consumption tracking error with that of other ETFs tracking the Nifty 50 TRI. With a tracking error of 0.12 per cent in a one-year period, the tracking error of Nippon fund seems fairly comparable with the average tracking error of 0.08 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 significant challenge even with a large asset base, given the large-cap tilt of the index.

About the AMC
With over Rs 1.28 lakh crore of equity assets spread across 25 actively managed funds, ICICI Prudential AMC ranks second. The fund house's passive equity basket (index funds and ETFs) has an AUM of over Rs 25,000 crore and enjoys the fourth position in this space. The AMC has 16 ETFs in its equity ETF product suite, of which six are thematic, covering banking, healthcare, IT, and FMCG sectors.

The two most important metrics of managing passive funds are expense ratio and tracking error. And it seems ICICI Prudential seems to be doing a reasonably good job on both fronts vis-à-vis other funds tracking the same index (see the below table).