Goldman Sachs Central Public Sector Enterprises (CPSE)  ETF s a specialised fund launched to help the government sell public sector stocks. CPSE ETF   made a stellar debut on the stock markets on Apr 4 2014. In this article we shall talk about what are Exchange Traded Funds (ETF), How do they differ from Mutual Funds or Index Fund. Then talk about Goldman Sachs Central Public Sector Enterprises (CPSE)  ETF, it’s NFO, it’s debut, it’s CPSE index and what should one consider before invest in Goldman Sachs CPSE ETF?

What is an Exchange Traded Fund (ETF)? How does it differ from Mutual Fund or Index Fund?

Let’t start from mutual fund. A mutual fund

• Contains a pool of different shares of individual stocks and or bonds, which are specifically chosen by the funds’ management team.  So Mutual funds are associated with active management
• The price of a mutual fund, NAV, does not vary during the course of the trading day because it is set at the end of each trading day.
• All mutual funds have expenses including commissions, redemption fees and operational expenses.
• Commissions (often also called as  loads)  are either front-ended or back-ended, meaning you can a commission when you either buy or sell, respectively. There are also no-load or non-commission mutual funds. On average, Mutual Fund annual expenses can range from as little as 0.1% to as much as 3% or more per year. These expenses are not seen by the investor on the monthly statements and are somewhat hidden and can have an impact on your overall return.

Index funds are mutual funds that are intended to track the returns of a market index. Index funds will hold almost all of the securities in the same proportion as its respective index and hence are considered to be passively managed. Index mutual funds are priced based on the NAV of the underlying securities

Exchange Traded Funds or ETF  is a investment option that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. Our article Stock Market Index: The Basics explains about the index in detail.

• A pool or basket of investments Like a Mutual Fund,
• But ETF’s are bought and sold like stocks.
• ETFs are generally based on an equity index and replicate that index in their portfolio so that investors can invest in it easily.
• Price of the ETF is determined by investor demand at any given time during the trading day.
• They connote a passive investment strategy, products that seek to replicate the performance of a certain benchmark instead of seeking to beat it.
• ETF’s many times have lower expenses then a similar mutual fund in that there are no loads and the operating expenses are often lower.

Gold ETFS are a good way to buy gold. Which Gold ETF to choose?  explains in detail

What is Central Public Sector Enterprises (CPSE) ETF?

The CPSE ETF is an

• Open-ended scheme.
• It consists of shares of 10 major public sector units, such as  Oil & Natural Gas Corporation, GAIL India and Coal India the blue-chip Maharatna, Navaratna and Miniratna
• The CPSE fund’s underlying index is a new index ,CPSE Index, that the National Stock Exchange launched in Mar 2014. It will do this by holding exactly the same stocks that make up the index, in the same proportions.
• It is  managed by Goldman Sachs Asset Management
• Entry & Exit Load are NIL
• The CPSE ETF plans to charge an annual fee of no more than 0.49 per cent of assets.
• Fund Manager is Payal Kaipunja
• The Scheme is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme, 2013. So it qualifies for a tax exemption up to Rs. 25,000 under section 80CCG provided an investor’s gross total income does  not exceed Rs. 12 lakh mark and second, and he is a first time investor in equities.

CPSE ETF

More details about CPSE ETF are at GoldManSachs CPSE ETF webpage.

Which companies make up CPSE ETF?

• The CPSE index today has ten stocks, chosen on three criteria :  a 55 per cent Government holding, a 4 per cent dividend yield, seven-year dividend paying record and a free float market cap of ₹ ,  1000 crore or more. As Companies making up this fund have been selected for their dividend record in the last seven years; therefore, the fund is likely to receive steady cash flows from its holdings in the form of dividends. The average dividend paid by companies making up the CPSE index is 3.5 per cent (of their market price). That is more than twice the market’s dividend yield of 1.4 per cent.
• The CPSE index is made up of stocks that the Government wants to divest. That tends to restrict stock choices. For instance, though the index has stayed away from troubled PSU banks or oil marketing companies, it doesn’t feature attractive PSEs such as PowerGrid or NMDC.
• It is heavily weighted towards energy stocks (59 per cent of the portfolio), metals (17 per cent) and finance (13.5 per cent).The top stock ONGC has a heavy 26 per cent weight in the portfolio. With no representation from defensives and a portfolio heavily tilted towards policy-heavy, cyclical stocks, stocks in the ETF are inexpensive, but can prove quite volatile and vulnerable to economic cycles.

Stocks that make the fund CPSE ETF are given below. An investor who wants to invest in this basket of public sector stocks can explore buying this ETF instead

Comparing CPSE Index

Based on Data as on 28th February 2014.

About the initial or New Fund Offer of CPSE ETF

• It’s NFO was from 19th Mar to 21 Mar 2014.
• The ETF during its initial offer collected money from investors and passed it on to the Government. The Centre then deposited shares of equal value from the PSEs in the ETF.
•  5 per cent NFO discount : It meant when Govt. of India when deposited the shares in ETF, provided a 5 % discount in existing prices to this ETF scheme. E.g.Say  ONGC is trading at Rs 320 share price. But when GS ETF purchased from Govt. of India, they would allot shares @ 5% discounted prices and would be allotted at Rs 312. This discount would be given based on the underlying CPSE Index shares.
• Retail Investors who bought units in NFO (for less than  2 lakh) are eligible for additional loyalty bonus units. Those who hold the units for one year from allotment will be credited with one free bonus unit for every 15 units held. It means you would get benefited with 6.66% returns irrespective of market price of such unit after 1 year holding period.

The CPSE ETF new fund offer attracted bids worth ₹4,363.39 crores was collected from 38,409 applications,  against the Government target of raising ₹3,000 crore.  CPSE ETF is  the biggest equity ETF in India as the combined assets under management (AUM) of 24 equity ETFs is not even Rs 1,400 crore. This is not even one per cent of the total industry AUM of Rs 9,16,393 crore. Though Indians are slowly warming up to ETFs. Assets under management of ETFs in India have gone up to Rs 11,807 crore in September 2013 from Rs 1,396 crore in March 2009. The success of the scheme helps government meets its disinvestment target of Rs 16,000 crore

How was the debut of CPSE ETF?

Shares of the CPSE Exchange Traded Fund (ETF) made a stellar debut on Apr 4 2014, both on the price and volume fronts.

• The ETF ended 11.17 per cent higher at ₹19.40 on the NSE as against the issue price of ₹17.45. In intra-day trades, it touched a high of ₹19.43.
• Especially significant was the high trading volume, signalling investor/ arbitrageur interest, as 8.35 crore shares changed hands during the day. Of this, 7.07 crore or 84.75 per cent shares were up for delivery.

Similar funds like CPSE ETF

There are actively managed PSU funds such as the Religare Invesco PSU Fund, Sundaram PSU Opportunities, SBI PSU and Baroda Pioneer Opportunities. Their fund managers select the best PSU stocks and keep changing the portfolio with shifting prospects. These fund charge expense ratios of 2.5 per cent or more of the assets managed. The CPSE ETF plans to charge an annual fee of no more than 0.49 per cent of assets.  The difference in expense ratio can translate into an additional annual return of up to 2 per cent.

Conclusion

The scheme provides an opportunity for investors to be part of the top 10 PSUs — ONGC, Gail, Coal India, Indian Oil, Oil India, Power Finance Corp, Rural Electrification Corp, Container Corp, Bharat Electronics and Engineers India. Investing in PSE stocks is a good idea today, as they are available at a bargain. The CPSE ETF is the low-cost route to do this. But invest in the ETF only if you can actively track returns and book profits when the stocks run up.

The whole point of investing through an mutual  fund, even an ETF or an index fund,  is that you should not have to decide whether and how much exposure you should have to a certain type of stock and how long you should maintain that exposure. It is usually recommended for  fund investors to invest only in diversified funds. If you want to  buy a sectoral or a thematic fund please understand the risks associated with it.Even if you accept the logic of a thematic fund, it has to be an investing theme, like banks or IT or consumer goods or auto or something else that you think will do better than the rest of the market. Understand that CPSE ETF is different,  a thematic fund where the theme happens to be the promoter , unlike a sector fund, where there is a unified investment case for a particular set of stocks.

 Related Articles

• Stock Market Index: The Basics
• Commission on Post office schemes,Insurance, Stocks and Mutual Funds
• What is Demat Account : Brokerage,Charges,Comparison
• Direct Investing in Mutual Funds
• Which Gold ETF to choose?

Did you invets in Goldman Sachs CPSE ETF? Why or Why not? Do you invest in ETFs or stocks? How will the Goldman Sachs PSU ETF will perform?