All You Need to Know About CPSE ETFs

While it is common for analysts to espouse the strategy of investing on dips by timing the market, such active trading strategies can be hard to put into practice. These become even harder to apply when the markets are highly volatile, as is the case today. The concerns over rising inflation, monetary tightening, global recession, and the uncertainties over the Russia-Ukraine war have been keeping the market participants on their toes. As a result, many investors are now looking for passive trading options.

Investors and traders typically have the option to pursue passive trading by investing in Exchange-Traded Funds (ETFs), which passively track an index and are traded on a stock exchange. CPSE ETF is one such lucrative option. Indeed, the CPSE ETF share price has generated over 40% annualised returns in the past year. 

But what is CPSE ETF exactly, and how to invest in it? We elaborate on these details below.

What is CPSE ETF?

CPSE ETF is an exchange-traded fund that passively tracks the NIFTY CPSE Total Return index. For the uninitiated, the CPSE full form is Central Public Sector Enterprises. This NIFTY CPSE index is constituted of a basket of public enterprises that the government plans to divest from. 

CPSE ETF was launched in 2014, and it was oversubscribed 1.45x times. It is currently being managed by Nippon AMC and has over Rs. 19,000 crores of AUM. Till now, 7 tranches have been offered to the investors, with the sixth FFO launched in 2020. The units of CPSE ETF are tradeable both on NSE and BSE. 

Since the constituents of the NIFTY CPSE index vary, as the index is rebalanced quarterly, the stocks tracked by CPSE ETF vary similarly. Additionally, the stock weights are capped at 20% in the index. Currently, CPSE ETF tracks 11 equity stocks including NTPC, ONGC, Coal India, etc. 

Features of CPSE ETF

The CPSE ETFs are open-ended funds without any lock-in period. Their units are tradeable on a stock exchange, where investors can buy as little as 1 unit and gain exposure to all the CPSE stocks that form a part of the NIFTY CPSE index.

Almost 98.6% of the CPSE ETF is currently invested in equity stocks, with the remaining share in liquid securities. These equity holdings are dominated by large-cap companies, with over 75% exposure. Mid-cap companies account for another 20% of the CPSE ETF.

CPSE ETF is a highly-concentrated fund as most of its equity constituents belong to the power and oil & gas sector. Companies like NTPC, Power Grid Corp, and ONGC constitute almost 20% share each of the CPSE ETF.

Being passive funds, CPSE ETF has the lowest expense ratio in the industry. Its expense ratio currently stands at 0.05 % as compared to 2% for a typical mutual fund.

Performance of CPSE ETF

Since the CPSE ETF share price passively tracks the performance of  Navaratna PSU stocks, the fund ends up generating a very high dividend yield. CPSE ETF boasts a 6.78% dividend yield in the last month versus only 1.41% earned by the benchmark NIFTY 50.

On an absolute-returns basis, the CPSE ETF has generated 25.7% returns YTD and 114.04% since inception. Even though it has underperformed the NIFTY 50 historically, its performance has been spectacular, especially in the past year, where it has generated almost 43% returns. 

Additionally, these CPSE ETF stocks are cheaply priced. Their valuation multiples at 6.76x P/E and 1.6x P/B are way lower than the average Nifty valuations of 21.2x and 4.12x, respectively. 

The CPSE ETF performance is likely to persist, given the continuous efforts made by the government to improve the efficiency of its CPSEs. Besides, the government’s push toward the ‘Make in India’ policy and plans to increase infrastructure spending will benefit these CPSEs.

Finally, the CPSE ETF share price is not impacted much by the FII sell-off, since the CPSE ETFs receive inflows from EPFO.

Factors to Consider Before Investing in CPSE ETF

While investment in CPSE ETF allows you to safely gain exposure to PSUs, these companies aren’t bereft of risks. Due to a higher concentration of oil & gas stocks in the index, any adverse changes in the oil prices or changes in government regulations will impact the CPSE ETF’s unit prices. 

Besides, the overall return on these CPSEs will be affected by government regulations. Based on the government’s decision to go ahead with the privatisation of a particular CPSE or not, the index and the CPSE ETF undergo changes.

Furthermore, CPSE ETF’s highly PSU concentrated nature may not be suitable for all kinds of retail investors. This rings true, particularly for investors whose current portfolio shares a high correlation with the PSU stocks.

How to Invest?

For the fund’s tranche offerings, retail investors and non-institutional investors need to invest a minimum of Rs. 5,000 and Rs. 2 lakhs, respectively. The government usually provides a 3% discount on the listing price at the time of fund offering.

But to invest in CPSE ETF units post offering, you only need a Demat trading account. However, for buying more than 1 lakh units, you will need to purchase these units directly from the mutual fund house.

Conclusion

Investors can consider investing in the CPSE ETF if they have a high-risk appetite and want to invest in a fund manager-insulated fund. This ETF provides a better approach to targeting CPSEs instead of investing in them individually. Start you ETF journey with opening a Demat account on Angel One.