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New option for Index investors – Equal weighted ETF

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Motilal Mutual Fund files for a product based on CNX100 equal weighted index

INDEX investors, or investors who prefer to take a passive exposure to equity markets through an investment that mimics the movement in their chosen indices, are likely to be offered with a new, innovative index product from the stables of the mutual fund industry.

An offer document for a first-of-its-kind index-based exchange-traded fund (ETF) has been filed by Motilal Oswal Mutual Fund earlier this month with the securities market regulator, Securities and Exchange Board of India (Sebi). The index ETF, called MOSt Shares CNX 100 Equal Weight ETF, will have as its underlying index the CNX 100 equal weighted index, whose constituent companies are the same as that in CNX 100, but whose value is derived after assigning the same weight to each constituent-company against free-float market capitalisation-based weightages to the constitutent companies in the case of CNX 100 Index.


The free-float market cap based weightages are also used by all the other indices such as Nifty, Sensex, CNX 500, BSE 100 and CNX 200.

Motilal Oswal MF's proposed ETF on CNX 100 Equal Weighted Index, if approved by Sebi and if launched by the mutual fund, will be the first index product, an ETF or an index fund, to have an equally weighted investment portfolio and not an market cap weighted one. Motilal Oswal MF has in the past launched four passive products comprising two domestic equity ETFs, one US equity ETF, one gold ETF, and one actively-managed product in the form of a government securities-based debt fund.

At present, about 40 mutual funds offer over 200 actively-managed equity schemes, about 20 passively managed equity index-based ETF schemes, and another 23 passively-managed equity index fund schemes. Among the 43 index ETF schemes and index fund schemes, except for Motilal Oswal MF's own MOSt Shares M50 ETF , all are based on equity indices that follow the market cap-based valuation methodology. The MOSt Shares M50 ETF , which was launched in June 2010, is the only other ETF that invests in a portfolio, comprising constituents of a market cap-weighted index, Nifty in its case, but with weightages assigned not the same as the index weights. Motilal Oswal MF uses a proprietary pre-defined methodology that assigns weights to the lot of 50 Nifty stocks based on a stock's fundamentals such as return on equity, net worth, share price and retained earnings. A proprietary methodology such as this involving subjective components does not agree with those passive index investors seeking a pre-defined, verifiable and methodology.

The new proposed MOSt Shares CNX 100 Equal Weight ETF, however, will offer passive index investors the same objectivity in methodology which about 42 other index ETFs and index funds offer. But since it will be the first to assign equal weights to an index's constituents, it will have far lower level of portfolio concentration in a handful of stocks, compared with market cap-weighted index ETFs. A CNX 100 Index ETF, for instance, will have invested roughly 30 per cent in the top five stocks and roughly 47 per cent in the top 10 stocks. But a CNX 100 Equal Weighted Index ETF will invest not more than 5 per cent and 10 per cent of its corpus in the top five and 10 stocks.

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