NFO review: Axis Banking ETF offers low cost exposure to beaten down banking sector

The banking index benchmark is trading 19-20% down year to date and the ETF can serve as an entry point for risk-taking investors to take a bite-sized exposure to lenders

Kumar Shankar Roy Oct 16, 2020

Banking & FinanceAxis Mutual Fund, one of the fastest-growing fund houses in India, has opened its new fund offer (NFO) – ‘Axis Banking ETF’ to subscription. It is an Exchange Traded Fund that offers investors an opportunity to invest in the biggest banks in India. The NFO closes on October 29, 2020

The fund is designed in a manner that tracks the performance of the 12 largest banks listed on the NSE. Only banking stocks that are allowed to trade in the F&O segment are eligible to be constituent of the Index. Currently, the index has 83.3% exposure to private banks and 11.7% exposure to PSU banks. Let us know more about this product.

Why the banking sector now

While the weight of Banking in the Indian markets has been going up steadily over the last decade and it is now the largest sector in the key equity market benchmarks such as Nifty 50, the sector is facing investor concerns. This is quite easily understood by looking at how the Nifty has almost recovered smartly in the year to date (YTD) period, but Bank Nifty is still 19-20% down.

This presents both an opportunity and a threat. If things improve from this level, buyers will be well-placed. If things worsen further, never mind if they improve later, buyers will not be well-placed. It all depends on how long can you hold.

Bank Nifty has 12 stocks. These include (alphabetically) Axis Bank, Bandhan Bank, Bank of Baroda, Federal Bank, HDFC Bank, ICICI Bank, IDFC First Bank, IndusInd Bank, Kotak Mahindra Bank, Punjab National Bank, RBL Bank, and SBI. When you buy Bank Nifty you get exposure to all these 12 banking stocks in the same way they are given weight in the index.

Why ETF route

Axis Banking ETF is one of the late entrants to the banking ETF space. The longest-running bank ETF was launched in 2004 and is known as Nippon India ETF Bank BeES. In 2007, there was a PSU Bank ETF also launched.

In just the last 12 months year, SBI ETF Private Bank, UTI Bank ETF, HDFC Banking ETF, and ABSL Banking ETF have been launched.

Of course, being late is no crime in the investment world. All investors want is profit and gain. So if an ETF is launched late but gives higher returns, no one will complain.

The recent craze for ETFs is two-fold.

One, many investors are looking at cost-effective ways to play the Banking sector profit potential. Most of the bank ETFs charge 0.12% to 0.50% expense ratio. Bank ETFs are low cost. Compared to this, actively managed banking sector funds with a fund manager taking portfolio decisions cost a minimum of 2% and for some funds it is 2.5%. When actively managed funds under-perform, attention shifts to passively managed products like ETFs and index funds.

Two, ETFs are mutual funds that are like stocks. Mutual funds have a NAV declared once a day and to buy or sell you need go to the fund-house. ETFs have a NAV and also market price that can change based on demand-supply during trading because they allow investors to enter and exit on the stock exchange itself. So, many feel ETFs are better when it comes to gaining instant exposure to the markets, thereby equitising cash.

Axis MF fund-house speak

Chandresh Kumar Nigam, MD & CEO, Axis AMC said, “As a responsible fund house, Axis MF understands the need to offer a complete bouquet of offerings to investors. We want to develop, introduce, and provide the products that are relevant in the current context. Accordingly, we recognize the need to offer investors a choice of strategies including robust passive products. The launch of Axis Banking ETF is a part of that endeavor and we expect to take a number of initiatives to build up our passive product suite over time.”

Fund basic details

Axis Banking ETF – This is an Exchange Traded Fund tracking the NIFTY Bank index

Minimum investment – Rs 5,000 and in multiples of Re. 1/- thereafter

Benchmark – Nifty Bank TRI Index

NFO period – October 16, 2020 to October 29, 2020

RupeeIQ take

Buying a sector fund requires a big leap of faith. This is because exposure to one sector is fraught with risks. In a usual portfolio containing many sectors, one or two sectors doing bad can be counter-balanced with others holding forte. But when you buy one sector, then you have a weaker safety net. Bank ETF should be bought by investors who have an appetite for high risk.

Buying an ETF should be done based on some parameters.

1. Cost of the fund – Typically, smaller sized ETFs cost a lot more. This is because two ETFs tracking Bank Nifty are virtually identical. So, don’t pay one penny more than you have to when deciding between two products that are mostly the same. We will have to wait and see what is the Axis Banking ETF cost.

2. Tracking error – You are buying an ETF tracking Bank Nifty because you want to copy the upside. Tracking error measures a fund’s accuracy in tracking its underlying index. It is the difference between the fund’s performance and the performance of the index it seeks to track. An ETF with consistently lower tracking error is better. We will have to wait and see what is the tracking error in the Axis Banking ETF.

3. Trading volume – You are buying an ETF because you want to enter and exit on your own. If you enter or exit a counter that is not deep enough i.e. adequately traded, then the entry or exit price you want versus what you get can be quite different. The daily volume traded of an ETF can be taken as a starting reference point for liquidity signal. Trading volume is influenced by the activity of investors. We will have to wait and see what is the trading volume in Axis Banking ETF.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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