NFO review: HDFC Banking ETF offers concentrated exposure to banks; should you invest?

The new scheme will invest in a basket of 12 most liquid banking stocks of Nifty Bank Index, which consist 9 private sector lenders and 3 PSU banks

Kumar Shankar Roy Aug 11, 2020

ABSL Banking ETFHDFC Mutual Fund has launched the new fund offer (NFO) for HDFC Banking ETF from August 10. The offer closes on August 14. This is a plain-vanilla product that will aim to copy the NIFTY Bank Index, which tracks the performance of 12 most liquid banking stocks listed on the NSE. The ETF will compete with 10 other existing exchange traded funds who offer banking sector exposure. In this article, we will explain the nuts and bolts of the product to help you decide on whether you should invest or not. Read on.

Passive option

The HDFC Banking ETF is a passively managed exchange traded fund. Such products track an index. The HDFC Banking ETF will endeavour to track and provide similar returns to its benchmark — NIFTY Bank Index — and will invest in NIFTY Bank Index companies in the same proportion as the underlying index.

For investors, investment in HDFC Banking ETF provides a route to invest in large banking companies in India. You will get exposure to 12 most liquid Banking companies listed on NSE representing the NIFTY Bank Index. This list of 12 has 9 private sector lenders and three PSU banks. In terms of market cap, nine banks are largecap and three are midcap.

The units of HDFC Banking ETF will be listed as an Exchange Traded Fund on National Stock Exchange of India Limited and / or BSE Limited.

Do note that the NIFTY Bank index is one of the worst-performing 1 year sectoral baskets, down about 24%. We do not know if banking has hit a bottom.

Sectoral indices HDFC Banking ETF

Pros and cons of ETF investing

Advantage – The investment strategy & stock selection process of HDFC Banking ETF is clearly defined; it will replicate the NIFTY Bank Index & invest only in companies forming the index in the same proportion as the underlying index

Disadvantage – There will be no active fund management. Unless the NIFTY Bank index removes or adds a stock, the ETF cannot do it. Also, only investing in banking shares is a narrowly defined investment mandate.

Advantage – Buying a single unit of HDFC Banking ETF will offer diversification of 12 stocks in the banking sector forming part of the underlying index.

Disadvantage – Although the NIFTY Bank index looks diversified through 12 stocks, it is heavily concentrated. As on July 31, 5 stocks account for nearly 88% weightage. Just HDFC Bank alone has 26.68% weightage. Others are ICICI Bank 18.70% weightage, Kotak Mahindra Bank 16.66% weightage, Axis Bank 14.77% weightage and State Bank of India 11.14% weightage. Although they are fundamentally strong banks, we strongly believe a basket that has 88% weight in five stocks is unsuitable for the average retail investor.

Advantage – The units of HDFC Banking ETF will be listed on NSE and /or BSE & the fund-house says it can be easily liquidated during trading hours (subject to availability of Buyer/Seller). Authorised Participants / Large Investors also have the option of coming to the AMC for purchase/sale of units in creation unit sizes (12,500 units with 1 unit equivalent to 1/100th of NIFTY Bank Index)

Disadvantage – Every ETF has two prices. One is the NAV. Two is the market price on the exchange. Often, there is a gap between NAV and market price because of the demand and supply gap at the exchange level. The liquidity factor gets better, usually, as the ETF grows larger in asset size, since there are higher volumes of ETF unit trading.

Take a look at how various banking ETFs have performed and respective daily trading volumes.

Fund Name 1 Yr Ret (%) 3 Yr Ret (%) 5 Yr Ret (%) Trading vol.
Nippon India ETF Bank BeES -24.02 -3.61 2.94 9,17,521
Kotak Banking ETF -24.00 -3.65 3.03 4,59,792 *
SBI ETF Nifty Bank -23.98 -3.60 3.06 26,064
ICICI Prudential Private Banks ETF 1,038
ICICI Prudential Bank ETF -23.46 19,242
Aditya Birla Sun Life Banking ETF 90
Nippon India ETF PSU Bank BeES -44.69 -25.76 -16.83 25,172
Kotak PSU Bank ETF -44.74 -25.85 -16.89 1,533
Tata Nifty Private Bank ETF 20
Edelweiss ETF Nifty Bank -23.59 -3.36   0
Trading volumes on NSE on Aug 11 at 1140 AM * Dividend payout option

ETF operational details

Asset allocation – Securities covered by NIFTY Bank Index : 95%-100%, Debt Securities & Money Market Instruments : 0%-5%

Benchmark index – NIFTY Bank Index (Total Returns Index)

Fund manager – Krishan Kumar Daga

Load – No entry or exit load

Minimum application money – During NFO Period: Rs. 5,000 per application and in multiples of Re. 1 thereafter. On an Ongoing Basis: The minimum number of Units that can be bought or sold on the exchange is 1 (one) unit and in multiples of 1 unit. Directly from AMC: Allowed to Authorized Participants & Large Investors in form of creation unit size of 12,500 units.

Dematerialization – Units of the Scheme will be available in Dematerialized (electronic) form only

RupeeIQ take

Any sectoral investment bet is very risky. This is because the fortunes of all the investments are tied to one sector. Any Nifty Bank ETF is riskier due to the lop-sided construction of the index where five stocks account for nearly 90% of the money.

You can argue that ETFs are low-cost, but cost is not the only criteria in deciding the suitability of an investment product.

Furthermore, we strongly believe that investors are not able to price risks of investing in Indian banking stocks accurately due to the months-long moratorium in effect (till August 31 at least). This sets the stage for major disappointments when this artificial support of moratorium is removed.

Investing in Bank Nifty ETF is suitable only for investors with high risk appetite. Ordinary retail investors should stay away. Most multicap funds and ELSS funds give controlled exposure to BFSI or banks. Stick to them.


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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