NFTY: The Large-Cap Play On India's Post-Election Phase

seekingalpha07-05

rahul sapra/iStock via Getty Images India's Prime Minister Narendra Modi may have fallen short of a very high bar at this year's election, but the silver lining is that it also raises the likelihood ...

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Adding to the positive outlook are forecasts for a favorable monsoon in H2 2024 (per the Indian Metrological Department). As a result, the rural economy, a key source of weakness this time last year, could well drive the next leg of earnings upgrades (vs relatively modest low teens % growth estimates through fiscal 2026 for India's benchmark 'Nifty 50'). Edelweiss The technical setup is just as interesting. For starters, Indian interest rates are already far too restrictive, with the current 'real' (i.e., inflation-adjusted) benchmark rate running above neutral. Note that the monetary policy committee is also split 4-2 (four on hold vs two in favor of a 25bps cut), with the major hurdle, food inflation concerns, likely to be addressed by an above par monsoon. Last but not least is the prospect of a sustained reversal in foreign flows (note foreign investors are net sellers year-to-date) now that the election overhang has cleared and with many more sets to clear the registration pipeline. Reuters To capture the fundamental and technical momentum, investing in a large-cap Indian tracker fund makes sense. Instead of a more vanilla capitalization-weighted fund, though, the First Trust India NIFTY 50 Equal Weight ETF (NASDAQ:NFTY) is worth a look for investors willing to underwrite the tried-and-tested \"buy low/sell high\" approach inherent in NFTY's portfolio construction approach. Data by YCharts NFTY Overview - Not Your Typical Indian Large-Cap Play First Trust's India NIFTY 50 Equal Weight ETF isn't the only US-listed Indian large-cap tracker fund, but its equal-weighted approach sets it apart from comparables like iShares India 50 ETF (INDY) and iShares MSCI India ETF (INDA). The logic here is that, instead of a conventional capitalization-weighted approach, where a company's size determines its weight in the fund, equal weight (~2% in NFTY's case) is allocated to each holding regardless of market capitalization. To maintain this weighting cap, the NFTY portfolio goes through a quarterly rebalancing process, where outperforming stocks (i.e., those above 2%) are trimmed in favor of the underperformers (i.e., those below 2%). In essence, the fund implements a \"buy low/sell high approach\" to portfolio construction, which, as I highlighted previously (see NFTY: Equal Weight Is The Best Weight For Indian Stocks), has worked particularly well through PM Modi's last two terms. First Trust That said, investors do give up a fair bit on cost with NFTY - a result of its far smaller asset base and lower popularity vs more established capitalization-weighted trackers like INDY and INDA. As things stand, the fund manages $244m (up from $195m prior) and has a median bid/ask spread of ~35bps. Combined, with a 0.8% expense ratio, NFTY isn't as competitive on overall cost (fee + execution) vs INDA or INDA.     Assets (USD 'm) 30-Day Median Bid/Ask Spread Expense Ratio   First Trust India NIFTY 50 Equal Weight ETF 244.0 0.35% 0.80%   iShares India 50 ETF 953.7 0.08% 0.89%   iShares MSCI India ETF 11,337.0 0.02% 0.65%   Click to enlarge Sources: First Trust, iShares NFTY Portfolio - A Uniquely Balanced Allocation By virtue of its equal-weighted approach, NFTY spreads its sector exposures a lot more broadly than comparable India ETFs. While Financials is, like INDY and INDA, the largest allocation, it is a lot lower at 21.7%. Elsewhere, Consumer Discretionary (13.8%), Materials (12.2%), and Health Care (9.9%) are relative overweights, while Energy (8.2%) is the other big underweight. First Trust At the single-stock level, things are even more balanced thanks to the ~2% weighting cap for all fifty constituents. As a result, NFTY tends to run a relative underweight on typical blue-chip franchises like HDFC Bank (HDB) and Reliance Industries (RLNIY), as well as a relative overweight on smaller 'Nifty 50' names. Case in point - NFTY's top holdings currently are lesser-known large-caps like UltraTech Cement and Grasim Industries.   Holding Percent   UltraTech Cement Limited 2.16%   Grasim Industries Limited 2.13%   Reliance Industries Ltd 2.11%   LTIMindtree Limited 2.09%   Wipro Limited 2.08%   Click to enlarge Source: First Trust NFTY Performance - Equal Weight Remains the Best Weight The flip side of NFTY's higher cost is its outperformance throughout PM Modi's terms. Over the last five years, for instance, the equal-weighted approach has performed particularly well, returning an annualized +10.8% (vs +8.2% for INDY and +9.9% for INDA). Note that this is also net of a nearly four percentage point tracking error - a result of the many transaction costs associated with investing in India. First Trust Similarly, end-May figures on the First Trust page show NFTY has outperformed over the last year (+27.1% vs +18.6% for INDY and +26.6% for INDA). If anything, this underestimates the extent of NFTY's outperformance, given that quoted numbers don't yet include NFTY's post-election surge. Data by YCharts The logic behind why NFTY works is that unlike 'compounder' index funds like the S&P 500 (SPY), where upside is concentrated on a handful of stocks, Indian growth tends to be a lot more broad-based. This trend has only accelerated throughout PM Modi's last term, so in the likely event we see a similar backdrop for the next five years, there's a good chance that equal weight continues to be the best way to play India's large caps. The Large-Cap Play on India's Post-Election Phase  The Indian elections may now be done and dusted, but there remains plenty to look forward to heading into the back half. Chief among the near-term tailwinds is the prospect of an above-normal monsoon lending support to earnings growth and potentially a surprise rate cut in the coming months. Combine this with valuations that remain very fair relative to how underlying earnings are pacing, as well as technical support from foreign investors post-election, and you get a compelling case to stay long India, in my view. For all its flaws, equal-weighted NFTY, having outperformed through the last two PM Modi terms, remains a very worthy candidate to play the next leg of upside for Indian large-caps.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2449268983"}