Innovation reaches to Indian Investors – Try MOSt Shares NASDAQ-100 ETF

Imagine some of the most innovative companies on the globe; probably you would name Google, Apple, Ebay, Amazon or others etc. They have presence almost all over the globe. Now, if you want to buy these companies, you need to find an Indian broker who offers the facility to buy foreign shares. Probably there are very few brokers in India who offer to buy foreign shares; and that too comes at high cost ranging 1 - 4 per cent. Moreover, your investment will fall under the foreign investment limit of        $ 2,00,000. So, as an individual, you can’t invest more than US $ 2,00,000.

Here come your solutions – Invest in MOSt Shares NASDAQ-100 ETF

Motilal Oswal Mutual Fund, after trying the domestic innovations in the form of M50 (a large cap oriented fund) and M100 (a mid cap oriented fund) – these funds got wide acceptance from investors – launched MOSt Shares NASDAQ-100 ETF, India’s first US Equity ETF providing exposure to US and International firms on NASDAQ Index.

Why MOSt Shares N100?

·         The fund provides unique access to World’s most innovative firms; all non-financials including some market leaders like Google, Apple, Cisco, Baidu and many more.

·         It is Rupee dominated investment and does not fall under the foreign investment cap of US $ 200,000.

·         It is a passive investing with no discretion to Fund Manager; that too comes at a lower cost (relatively at 1 per cent).

·         Very low-correlation of NASDAQ-100 with India’s major indices – around 0.29 with Sensex and Nifty – thus, providing the ideal diversification option for domestic investors.

·         The NASDAQ-100 has a healthy mix of all sectors – Technology, Consumer Services, Health Care, Industrials, Telecommunications, Consumer Goods, Oil & Gas and Basic Materials – with around 60 per cent of holdings falling under Technology.

·         The NFO being treated as Other than Equity Product (since the investment is made outside India) will offer Double Indexation Benefit as the AMC claims that the allotment would happen before March 31, 2011.

Why NASDAQ-100 Index?

·         No doubt NASDAQ-100 Index® (NDX) is one of the widely watched indices in the world. It includes 100 of the largest domestic and international non-financial securities listed on The NASDAQ Stock Market based on market capitalization.

·         NASDAQ-100 comprises the A (Apple) to Y (Yahoo) of innovation. Comparatively, the index has sound fundamentals, low valuation, low correlation with Indian markets and global spread of innovation.

Performance Analysis (NASDAQ-100 vs Nifty)

One can suspect why an investor needs to diversify beyond India if he is getting better returns in India only. It is imperative to state that the decoupling story no longer holds true in India vis-à-vis to developed economies. However, the low correlation of NASDAQ-100 against major Indian indices makes a strong case on the performance of NASDAQ-100. The long term growth story of NASDAQ-100 is still intact as relevant from the historical performance of NASDAQ-100 vs Nifty.

While in 1-year and 3-years category, NASDQ-100 has beaten Nifty by good margin, in other categories, it lagged Nifty. However, in 15-years category, (In India, hardly any investor keeps his money locked for 15 years), the NASDAQ-100 has bitten Nifty by almost 300bps.

Why MOSt Shares N100 at this juncture?

Most emerging markets have dramatically come out of the global financial crisis since the fall of Lehman Brothers at faster pace in comparison to its developed counterparts; however, the inflationary pressure kept on building too, thanks to hike in commodities’ prices around the globe, supply-side issues including demand related factors. Also, there had been geo-political tensions arising from Tunisia spreading to Egypt, then Libya and now Bahrain. The natural catastrophe in Japan colliding with the man-made catastrophe (Nuclear Plants blast and leakage) has further worsened the situation. The global crude prices have gone beyond US $ 111 per barrel and it is estimated if the similar trends continue, it can touch US $ 200 per barrel.

Moreover, the developed countries followed the Tortoise race in ‘Hare and Tortoise’ race and have started recovering from the financial crisis recently. They have been showing signs of increased employment, higher productivity and increasing economic growth. So, in a nutshell, the United States is expected to re-emerge as an engine driving global growth.

Words of Caution

Diversification is the key to investors’ portfolio to minimize the losses and the N100 fits in due to low correlations with Indian indices. However, any uneven and significant movement of rupee-dollar exchange rate against can have a bearing on returns. Also, in the long run, Indian equities may outperform US equities as the strong domestic consumption story still remains intact.

Happy Investing!

Exchange Traded Funds (ETFs) Innovations – MOSt Shares M50 ETF

Global Journey
ETFs have travelled a long distance since its inception in 1993 in USA. It took 7 years (from 1993 – 2000) to get it widely accepted among investors. Once it drew attention from investors, it grew leap and bound; the global ETF assets has reached an all time high of US $ 1.03 trillion as on March 2010 from an estimated US $ 463 million in 1993, clocking a CAGR of 56 per cent. On US Exchanges, 11 out of top 25 volume leaders/stocks are ETFs. Some of the top volume leader ETFs is SPDRs, iShares MSCI Brazil Index, Ultra Short Russel2000 ProShares, etc. These ETFs account for 78 per cent of total volume out of top 25 traded stocks on US Stock Exchanges. It was less than 25 per cent 10 years back.


Indian Journey
Not very old in India, ETFs started its journey in 2001 after Benchmark AMC forayed into this unique proposition. Since then, the ETFs grew by leap and bound. The domestic ETF assets grew from Rs. 7 crore in 2001 to Rs. 3,203 crore as on May 31, 2010. However, the main course of action in ETFs got intensified in the recent bull period. Indian equities component of Global Emerging Markets ETFs account for US $ 5.5 billion of AUM while the domestic equity ETFs now account for US $ 0.5 billion. Overall, over the past year, around 20 per cent of the net inflows into the Indian market have come from ETFs, thereby, ETFs a very significant component of Indian fund flows.


Is ETFs good for investors?
The global historical data suggests that the fund managers have not been able to beat the benchmarks constantly over a longer period. In efficient market scenario, the active funds find difficulty in beating their benchmarks. So, it is always preferable for investors to look for a product which provide a decent return, at least comparable to its benchmark with bounty of other benefits such as tax efficiency, low expense ratios.
ETFs are pools of stocks, bonds or in a few instances other types of investments such as Gold that you can trade like stocks. ETFs tend to have very low annual expenses – much lower than the actively managed funds. Moreover, ETFs are high tax efficient i.e. they tend to minimize distributions, which will drive down your post-tax returns. ETFs are listed on stock exchanges and can be bought and sold like any other company share.


Product Innovations
Innovation is the key to success. For now, at least, all ETFs are an index fund which mirrors an index or a benchmark, unlike actively managed funds whose managers try to beat the market. There have been talk of companies bringing out actively managed ETFs, but so at least in India, it has not been manufactured. Currently, in India, the underlying for ETFs are Index, Sector, Money Market Instruments, Arbitrage etc. One more type to add in the basket of innovated products is actively managed ETF – MOSt Shares M50 ETF, the first of its kind in India, launched by Motilal Oswal Mutual Fund.
Passively-managed ETFs follows its index and invest in the same proportion as of its index while actively-managed ETFs follow their own fundamentally defined rules.

MOSt Shares M50 – Is it another offer in the crowd?

Recently SEBI’s Chairman C B Bhave commented if 3000 schemes flooded in the industry served a purpose to investors’ fraternity as they have failed to convince the investors of the long-term benefits of their products. He also suggested that the mutual funds should provide better returns by rolling out simpler products. Now coming to another zone where Mutual Funds continue to roll out new NFOs – HDFC Gold ETF, Peerless Income Plus Fund, MOSt Shares M50 ETF, Taurus MIP Advantage, Benchmark Short Term, Axis Triple Advantage and many Fixed Maturity Plans (FMPs). I have been wondering if I am an investor which one I should choose. As a simple investor, my aim should be to maximize returns with least volatility; also I should bear minimal costs.


Among the above captioned NFOs, all the NFOs were more or less similar to the existing plans offered by another fund houses; I found a unique offer by Motilal Oswal AMC with its maiden NFO MOSt Shares M50 ETF. Though the ETF concept is new in India and has not been well received by investors yet, ETFs are on high. Historically, it has grown exceptionally even in intermittent market. Let me give out in detail why MOSt Shares M50 ETF is unique and investors’ friendly.

Product Features

As claimed by Motilal Oswal Mutual Fund, MOSt Shares M50 ETF is India’s 1st fundamentally weighted ETF based on the S&P CNX Index (Nifty). Logically, it is the remixed version of Nifty 50. The fund house has created its own basket “MOSt 50 Basket”, intellectually owned by MOAMC and managed by India Index Services & Products Ltd. (IISL). The weights of stocks in MOSt 50 Basket will be decided by their pre-defined methodology based on stock’s fundamentals (ROE, Net Worth, Retained Earnings and Valuation).

The fund aims to generate investment returns with minimal costs and active investment style. With no entry and exit load, the investors get another opportunity in terms of liquidity. The fund manager will invest 95-100% of the money in MOSt 50 basket and the exposure to fixed income and money market instruments along with cash call will be restricted to 0-5% of the total money invested.

Investment Strategy

The fund has reworked the weights of stocks in Nifty based on its own defined fundamentals such as Return on Equity, Net Worth, Retained Earnings and Price. They have designed the capital allocation strategy of the MOSt 50 basket to reduce the risk associated with price volatility of individual constituents. The table 1 defines the basket classification of MOSt 50 Basket.

So, some of the companies will be more dominant than others based on the current methodology.

Back Testing

The fund has done the back-testing with current methodology for the last 3-year period and the portfolio has given an additional alpha (excess of returns over its benchmark, in simple terms) of 13.2 per cent. It has also beta value of 0.94 against Nifty beta of 1.

Should you buy?

As far as the ETF story is going on, it has been building up in India. People have started recognizing the importance of ETFs as fund managers have failed to outperform the benchmarks over a longer period. Moreover, this new ETFs, also called as active ETF scored over others and provide uniqueness in terms of simplicity and maximization of returns over a longer period.