New Delhi: DSP Investment Managers announced the launch of DSP Nifty 50 Equal Weight ETF, India’s First Exchange Traded Fund based on the Nifty 50 Equal Weight Index. In an equal weight index, each stock in it gets equal weight. Thus, if the strategy is applied to Nifty 50, the equal weighted index will own the same 50 companies as Nifty 50 and will have 2% weight to each company, unlike the current market cap weight design where some stocks get large weights like 9-10% and many stocks in the lower tail get only 0.3%. This gives all companies in the index an equal chance to contribute to returns rather than being overly dependent on the top 10.
The DSP Equal Nifty 50 ETF, owing to its methodology, aims to provide better sector and stock diversification compared to the Nifty 50 Index. The top 10 stocks accounted for nearly 60% of the weightage of the Nifty 50 index as of September 30, 2021, compared to only around 20% of the Nifty 50 Equal Weighted Index. The Nifty 50 Equal Weighted Index has outperformed the Nifty 50 index by 2.02% CAGR since inception and has outperformed the Nifty 50 Index in 12 out of 21 calendar years.
The DSP Equal Nifty 50 ETF follows two core investment principles – investing in sector leaders that can ride through market cycles along with better diversification across companies and sectors with equal stock weights that offer lower stock specific risks and lower sector concentration compared to the Nifty. Apart from a diversified portfolio at a relatively lower cost, the Nifty 50 Equal Weight ETF offers the advantage of the simplicity of buying and real time trading. The Equal Weight Index gets rebalanced on a quarterly basis. Owing to this quarterly rebalancing method, an equal weight portfolio has a built-in profit booking mechanism, in effect buying the underperformers at “low” and selling the outperformers at “high”. The New Fund Offer opens for subscription on October 18th and closes on October 29th, after which it will be purchased and sold on the exchanges.
“DSP has been the first mover in launching passive funds using the Equal Weight Strategy in India and we are excited to launch the first ETF tracking Nifty 50 Equal Weight Index in the country. When we studied this concept of equal weight indices globally, we noticed that over long periods equal weighting tends to earn better returns than market cap weighted indices. This happens as all the companies get chance to participate rather than just the top few. Such a strategy has its phase of underperformance when economy’s profits are polarised to select companies like in recent five years. However, over the long term as good companies across sectors grow and create value, an equal weight strategy gives meaningful weight to each company in the index. Equal weighting also ensures that the most over owned sector at any time is de risked,” says Kalpen Parekh, MD & CEO, DSP Investment Managers.
“Equal weighting takes advantage of certain market inefficiencies caused by behaviour biases, since the strategy is not affected by the over-optimism in certain stocks and over-pessimism in others. Such inefficiencies have helped equal weight index strategy to outshine traditional market cap based index strategies,” says Anil Ghelani, CFA, Head – Passive Investments & Products, DSP Investment Managers.