The ETFs that focus on energy, metals and FMCG are the first of their kind. But investing in these funds may not give the returns one hopes for. Because, while the idea of focusing on a sector is good, picking the right sector is easier said than done

Moneylife Digital Team

Axis Mutual Fund is all set to enter the growing market for exchange traded funds.  It has filed offer documents to launch Axis Metal ETF, Axis FMCG ETF, Axis Banking ETF and Axis Energy ETF. Currently, there are no ETFs linked to energy, metals, and FMCG indices and these ETFs from Axis are the first of their kind.

All these ETFs are sector ETFs and will focus on stocks of just one sector. The theoretical case for sector funds is strong, because it can be based on two very strong tenets of investing. One, the focus and concentration on a few stocks works wonders. Two, identifying the right sector is the key to stock market success.

Sector funds incorporate both these aspects of investing. They focus on just one sector at a time and if the sector does well, the fund’s performance can be among the best. Therein lies the catch—accurately picking a winning sector, just in time, is easier said than done. It is known only in hindsight. Fund managers have always been bad in selecting the winning sectors. They were caught unawares by the tech bust of 2000 and the sluggish pace of infrastructure development since 2006.

That is why we believe that while the theoretical logic of sector funds is attractive, in practice, it is best to avoid them. They cannot beat the best of diversified equity funds.

Axis Energy ETF

As per the offer document, Axis Energy ETF can invest 95%-100% of its corpus in stocks covered by the CNX Energy Index, and up to 5% in money market instruments. The CNX Energy Index constitutes stocks like BPCL, Cairn India, Gail (India), NTPC, Reliance Industries and Tata Power. The fund aims to be fully invested in equity at all times. The CNX Energy Index has given a compounded return of 12.68% in the last five years.

Axis Metal ETF

This will invest 95% of its corpus in stocks in the BSE Metal Index and up to five per cent in money market instruments. The BSE Metal Index comprises 13 stocks, among them Tata Steel, Hindalco, Jindal Steel & Power, Sesa Goa and JSW Steel. Tata Steel has the highest weight in the index at 22.38% (as on 9 May 2011). The BSE Metal Index has given a compounded return of 12.74% in the last five years.

Axis FMCG ETF

The fund will invest 95% of its corpus in the CNX FMCG Index and up to five per cent in money market instruments. The CNX FMCG Index constitutes 15 stocks which include Britannia, Colgate Palmolive, Dabur and ITC. The CNX FMCG Index has been able to give a return of just 9.61% in the last five years.

Axis Banking ETF

Currently, there are three bank ETFs—Bank BeEs, Kotak PSU Bank ETF and Reliance Banking ETF. Axis Banking ETF will invest in stocks that constitute the CNX Bank Index. CNX Bank Index has stocks like Axis Bank, Bank of Baroda, Bank of India and HDFC Bank. CNX Bank Index represent 14.79% of the free float market capitalisation of the universe of stocks traded on the National Stock Exchange as on 31 March 2011. The CNX Bank Index has given a return of 20.21% in the last five years.

A bigger problem with ETFs in India is that they are illiquid. You pay more than the NAV to buy them and if you are forced to sell in panic for whatever reason, you pay an even bigger price, because the purchase bids may be much lower than the fair value.