Is Bharat22 ETF a good investment?

The Bharat22 ETF opens for subscription for retail investors on Nov 15th. I was curious about this latest NFO (New Fund Offer) for two reasons:

  1. because it’s an ETF (Exchange Traded Fund) and not a Mutual Fund – My last post on Mutual Fund being India’s true sunshine sector, I had pointed out that 2017 investment in non-Gold ETF’s is 40 times what it was in Sep 2013
  2. it’s a fixed portfolio of stocks with defined weights and not an actively managed fund, therefore possible to backtest the portfolio to see how it has done in the past

The components of the Bharat22 ETF

No.CompanySectorWeight %
1National AluminiumBasic Materials5.13%
2ONGCEnergy5.54%
3IOCLEnergy5.00%
4BPCLEnergy4.54%
5Coal IndiaEnergy3.72%
6State Bank of IndiaFinance7.25%
7Axis BankFinance7.82%
8Bank of BarodaFinance1.22%
9Rural Electrification CorpFinance1.18%
10Power Finance CorpFinance0.99%
11Indian BankFinance0.21%
12ITC LtdFMCG14.26%
13Larsen & ToubroIndustrials16.92%
14Bharat Electronics LtdIndustrials3.48%
15Engineers India LtdIndustrials1.44%
16NBCC (India) LtdIndustrials0.68%
17Power Grid CorpUtilities7.73%
18NTPC LtdUtilities7.07%
19GAIL India LtdUtilities4.25%
20NHPC LtdUtilities1.08%
21NLC India LtdUtilities0.27%
22SJVN LtdUtilities0.23%

The marketing brochure shows that the Bharat22 would’ve beaten the NIFTY in annualized returns over a three-year timeframe, would’ve been just behind it over five years and way ahead over a 10 year period. I wanted to do my own quick backtest to compare year-on-year performance, and also because it makes me more comfortable to crunch my own numbers.

The backtest:

  1. Assume that ₹1,00,000 each was invested in the NIFTY and in the Bharat22 ETF in the weights in the above table. No other money was invested.
  2. Bharat22 was rebalanced annually on the first day of the calendar year
  3. For companies that did not exist in 2008, their share was invested in the existing stocks in the same proportion as their weights

Bharat22 ETF outperformed the NIFTY by a comfortable margin

The Calm Investor | Bharat22 ETF

The difference compounded returns over the 9 3/4 years period under consideration is stark. ₹1L invested in the NIFTY in Jan 2008 would be worth ₹1.7L while the same amount invested in the Bharat22 ETF would be worth ₹3.8L in Nov 2017.

 B22NIFTY
Annualized Return (2008 - 2017)14.7%5.4%
Volatility (Std Deviation of Annual Returns)41%34%

Bharat22 outperformed the NIFTY 7 out of 10 years in the test

The Calm Investor | Bharat22 Returns

It’s one thing to know that strategy A ended at a higher value over strategy B in any backtest with the benefit of hindsight. But to be able to conclude that A was superior to B, we need how they did in the good and bad years.

While it’s commendable that the Bharat22 did well in 2009 and 2014, more importantly, it did “less badly” in the down years of 2008, 2011 and 2015. This means if you had been invested in 2008, you were less likely to panic and pull out because your portfolio would’ve fallen by less than the broader market.

Bharat22 would’ve given you some sleepless nights

It would not have been smooth sailing with the Bharat22. Large drops in portfolio value test the temperament of any investor.

 Bharat22NIFTY
Largest Calendar Year Loss₹27,770 (2011)₹51,840 (2008)
Largest Drawdown₹64,689 (Feb 2016)₹61,254 (Oct 2008)

When considering calendar years, the Bharat22 does better than the NIFTY which had it’s disastrous drop in 2008, losing over half the portfolio value. However, when considering maximum drawdown (the biggest absolute drop in value over any time frame), the Bharat22 is more volatile and shows a massive fall leading up to Feb 2016. This value is relatively lower as a % of the portfolio but remember your originally invested amount was ₹1L.

Overall:

  • If I had designed an annually rebalanced portfolio that performed like the Bharat22 ETF over that time frame, I’d be quite satisfied as an investor
  • However, this is only a backtest, and no one can really tell whether it will continue to outperform the NIFTY over the long-term
  • Finally, while the 3% discount to current prices is useful for retail investors, overall market valuations show a fair bit of froth, and so near-term (1 – 3 year) returns might not be great. That said, of all the places to invest in the current market, the Bharat22 ETF is definitely not the worst

Note: You’re probably thinking, “where is the disclaimer in this post?” of what looks like a marketing post. That’s because it’s not. The views and analysis in this post are purely my own and they are completely objective to the extent my inherent biases allow me to be. 

3 thoughts on “Is Bharat22 ETF a good investment?

  • November 15, 2017 at 10:56 am
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    What abt the dividends in returns? PSU are dividend champions.
    But i am not in favor of Bharat22. I better replicate my own bharat 22 and earn dividends.

  • November 15, 2017 at 11:18 am
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    Karthik, ETFs pay out all dividends earned, typically cumulatively every quarter.

  • November 15, 2017 at 9:30 pm
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    This is best fund or bad fund????? Please ask me sir. Vertical confiused.

What do you think?