HDFC NIFTY100 Quality 30 ETF: Aims to Improve the Quality of Your Portfolio

Smart-beta investing basis 'Quality' factor involves focusing on the quality attributes of stocks to guide portfolio decisions. Quality metrics are financial attributes that gauge the profitability and solvency of a company - namely RoE, EPS growth and financial leverage. Factor investing through passively managed funds provides investors with the benefit of low costs and transparency and tracks indices that are modelled on specific, well-researched and quantifiable stock characteristics.

HDFC Mutual Fund has launched 3 new smart beta exchange-traded funds and the one focusing on the 'Quality' factor is HDFC NIFTY100 Quality 30 ETF. It is an open-ended scheme replicating/tracking NIFTY100 Quality 30 Index.

Commenting on the launch, Mr Navneet Munot, Managing Director and Chief Executive Officer at HDFC Asset Management Co. Ltd. said, "Smart Beta investing is popular globally with AUM rising steadily. HDFC AMC is happy to expand index solution offerings for investors that are backed by empirical research. Smart Beta ETFs offer one-shot diversification of portfolio at a low cost, and is proven tool for investors who seek returns over the long-term. The fund house has 20 years of experience in managing passive funds, which comes with highly disciplined and robust Investment and Risk Management policies and processes."

The investment strategy for HDFC NIFTY100 Quality 30 ETF will be as follows:

HDFC NIFTY100 Quality 30 ETF endeavours to mirror the benchmark index, subject to tracking errors. The scheme aims to invest in stocks forming part of the Underlying Index in the same ratio as per the index to the extent possible and to that extent follows a passive investment strategy, except to the extent of meeting liquidity and expense requirements.

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Since the Scheme is an exchange-traded fund, it will only invest in securities constituting the Underlying Index. However, due to corporate action in companies comprising the index, the Scheme may be allocated/allotted securities which are not part of the index. Such holdings would be rebalanced within 7 Business Days from the date of allotment/listing of such securities.

The scheme's performance may not be commensurate with the performance of the underlying Index on any given day or over any given period. Such variations are commonly referred to as tracking errors. These schemes intend to maintain a low tracking error by aligning the portfolio in line with the Index. The stocks comprising the underlying Index are periodically reviewed by Index Service Provider. The scheme would invest in Constituents of NIFTY100 Quality 30 Index; it may also invest in debt & money market instruments in compliance with regulations to meet liquidity and expense requirements.

Under normal circumstances, the asset allocation will be as under:

About the benchmark

The NIFTY100 Quality 30 index includes the top 30 companies from its parent NIFTY 100 index, selected based on their 'quality' scores. The quality score for each company is determined based on return on equity (ROE), financial leverage (Debt/Equity Ratio) and earning (EPS) growth variability analysed during the previous 5 years.

The weights of the stocks are derived from their Quality scores and the square root of free float Mcap. The stock weight is capped at 5%.

Here's a list of the top 10 constituents by their weightage and sector representation under the index:

Note that the index will rebalance semi-annually in June and December

Who will manage HDFC NIFTY100 Quality 30 ETF?

Mr Krishan Kumar Daga and Mr Arun Agarwal will be the designated fund managers for this scheme.

Mr Krishan Kumar Daga is a B. Com graduate and has over 32 years of experience, of which 13 years in Equity Research and over 14 years in Fund Management. Prior to joining HDFC AMC, he was associated with Reliance Capital Asset Management Company Ltd. as Fund Manager/Head - ETF, Reliance Capital Ltd. as Vice President, and Deutsche Equities as Vice President.

At HDFC Mutual Fund, Mr Daga currently manages HDFC Arbitrage Fund, HDFC Banking ETF, HDFC Equity Savings Fund (Arbitrage Assets), HDFC Gold ETF, HDFC Gold Fund (FOF), HDFC Index Fund - NIFTY 50 Plan, HDFC Index Fund - SENSEX Plan, HDFC Multi-Asset Fund (Gold related instruments and Arbitrage Assets), HDFC NIFTY 50 ETF, HDFC SENSEX ETF, HDFC Nifty 100 ETF, HDFC NIFTY Bank ETF, HDFC Nifty Next 50 ETF, HDFC Nifty 100 Index Fund, HDFC Nifty100 Equal Weight Index Fund, HDFC S&P BSE SENSEX ETF, HDFC NIFTY50 Equal Weight Index Fund, HDFC Developed World Indexes Fund of Funds, and HDFC NIFTY Next 50 Index Fund.

Mr Arun Agarwal is a Chartered Accountant and B.com graduate. Collectively he has over 23 years of experience in equity, debt and derivative dealing, fund management, internal audit and treasury operations. Prior to joining HDFC AMC, he was associated with SBI Funds Management Pvt. Ltd. as Assistant Vice President, ICICI Bank Limited as Chief Manager, UTI Asset Management Pvt. Ltd. as Manager and UTI Asset Management Pvt. Ltd. as Assistant Manager.

At HDFC Mutual Fund, Mr Agarwal currently manages, HDFC Arbitrage Fund, HDFC Banking ETF, HDFC Equity Savings Fund (Arbitrage Assets), HDFC Gold ETF, HDFC Gold Fund (FOF), HDFC Index Fund - NIFTY 50 Plan, HDFC Index Fund - SENSEX Plan, HDFC Multi-Asset Fund (Gold related instruments and Arbitrage Assets), HDFC NIFTY 50 ETF, HDFC SENSEX ETF, HDFC Nifty 100 ETF, HDFC NIFTY Bank ETF, HDFC Nifty Next 50 ETF, HDFC Nifty 100 Index Fund, HDFC Nifty100 Equal Weight Index Fund, HDFC S&P BSE SENSEX ETF, HDFC NIFTY50 Equal Weight Index Fund, HDFC Developed World Indexes Fund of Funds, and HDFC NIFTY Next 50 Index Fund.

Fund Outlook - HDFC NIFTY100 Quality 30 ETF

HDFC NIFTY100 Quality 30 ETF aims to provide returns that closely correspond to the total returns as represented by the Nifty 100 Quality 30 Index, subject to tracking errors. The scheme endeavours to benefit from factor investing through the Quality factor strategy.

Quality works as a defensive factor to potentially maintain stability across various market cycles. The scheme focuses on the 'quality' factor of stocks which can eventually sustain long-term capital growth for your portfolio. The underlying Nifty 100 Quality 30 Index consists of the top 30 companies from its parent NIFTY 100 index, selected based on their 'quality' scores. The scheme selects stocks that have high efficiency, low financial leverage and stable earnings.

Historically, the underlying index has a relative outperformance during broad market weakness and has generated higher long-term returns than the NIFTY 100 TRI. The scheme provides investors with access to the Quality factor via a diversified portfolio of 30 companies. Also, the underlying index is predominantly large-cap oriented and provides investors with the benefit to invest in established large caps. The fortune of this scheme will depend on the performance of the underlying index.

Although the scheme allows investors an exposure to the top 30 Quality Businesses within the Nifty 100 universe, it is still prone to high market risks. The scheme will passively invest in limited high-quality stocks which creates a concentration risk. In addition, the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI's recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to the economic growth and continue the prevailing high market volatility. The margin of safety appears to be narrow and the clear direction for the equity market from the current elevated levels is uncertain. These factors among others may weigh down the index and its top constituents which may impact the scheme's performance and the portfolio may face higher volatility in the near term.

Thus, this scheme is suitable for investors with a high-risk appetite and a long investment horizon of at least 5-7 years to sustain market volatility. Ensure your investment objectives align with the fund.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst