SBI Mutual Fund has filed papers with SEBI for the launch of the SBI ETF-Momentum. If approved by the regulator, this is likely to be one of the more innovative ETFs available. The ETF will seek to replicate the returns of the Nifty Alpha 50 Index which tracks companies with high ‘alpha’ or outperformance.
What is Alpha
Alpha is the excess return given by a stock than what is predicted by the overall market trend. A stock’s return depends on alpha and on beta which is the relationship of the stock with the market. Choosing stocks on the basis of alpha is essentially a ‘momentum strategy.’
How the Nifty Alpha 50 Index is constructed
The Nifty Alpha 50 index imposes certain criteria for a stock to be included in it. The company must be among the top 300 companies by free-float market capitalisation, it should have a listing history of at least one year and it must meet certain trading frequency and turnover requirements. Companies who satisfy these conditions are ranked in descending order on the basis of alpha. One year trailing prices are used and the top 50 companies in terms of alpha are chosen. The index is rebalanced on a quarterly basis.
The Nifty 50 Alpha Index has delivered a CAGR of 25% over the past five years and 24% over the past year. Consumer goods have the largest weight (20.2%), followed by financial services (18.3%), industrial manufacturing (14.7%) and construction (10.9%). Major stocks in the index include Indiabulls Ventures (a brokerage), HEG (a graphite electrode maker), Graphite India, Avanti Feeds and Dilip Buildcon.
About SBI ETF-Momentum
SBI ETF-Momentum will have to invest 95% of its assets in the Nifty Alpha 50 Index with the rest being in money market instruments. The minimum investment amount in the NFO period will be Rs 5,000.
Being an ETF, investors can also buy units on the stock exchanges, any time after listing. They can also buy units directly from the fund house but this cannot be lower than the ‘creation unit size’ which tends to be a fairly high threshold.
Raviprakash Sharma will be the fund manager of the ETF. He presently manages other SBI ETFs like SBI Nifty ETF, SBI Gold ETF and SBI ETF BSE 100. However an ETF being a ‘passive product’ which merely seeks to track an index, the fund manager’s role is quite limited.