The stock market has been experiencing a decline in recent days, presenting an excellent opportunity for long-term investors to consider investing in passive funds, particularly Exchange Traded Funds (ETFs). Nifty is currently trading at a multiple of 2.60 P/E, and several ETFs have seen significant corrections from their upper levels—some by 16% and others by 22%.
In this article, we will analyze the top five ETFs that are currently available at attractive discounts and discuss their key performance metrics, expense ratios, tracking errors, and risk-reward potential.
Understanding ETF Investments
Before selecting an ETF, it is essential to evaluate the underlying index it follows. ETFs replicate the performance of the indices they track, meaning an investor in a Nifty 50 ETF is essentially investing in the Nifty 50 index.
A broad market correction provides investors with an opportunity to accumulate quality ETFs at lower valuations. Instead of investing a lump sum at once, a staggered approach—allocating funds in three parts—can help mitigate risk and optimize returns.
- Nifty Next 50 ETFs
The Nifty Next 50 index has corrected by approximately 17% from its peak, making it an attractive choice for investors. Three notable ETFs in this category are:
- Mirae Asset Nifty Next 50 ETF
- Nippon India Nifty Next 50 ETF (Junior B)
- ICICI Prudential Nifty Next 50 ETF
Performance Overview:
- 6-month returns: All three ETFs have declined by around 11%, underperforming the average category decline of 5%.
- 1-year returns: Each of these ETFs has delivered 22%, significantly outperforming the average category return of 13%.
- 3-year returns: The ETFs have generated approximately 16% annualized returns, compared to the category average of 12%.
- 5-year returns: All three ETFs have delivered 18%, exceeding the average category return of 15%-16%.
Key Metrics:
- Expense Ratios: Mirae Asset (0.05%), Nippon (0.17%), ICICI Prudential (0.10%)
- Tracking Errors: Mirae Asset (0.114), Nippon (0.09), ICICI Prudential (0.07) – lower is better.
Among these, ICICI Prudential Nifty Next 50 ETF stands out due to its lower tracking error and expense ratio, making it a solid choice for long-term investors.
- Nifty 50 ETFs
The Nifty 50 index has corrected by approximately 10.5% from its peak. Two noteworthy ETFs in this category are:
- ICICI Prudential Nifty 50 ETF
- Nippon India Nifty 50 ETF
Performance Overview:
- 6-month returns: Both ETFs have shown negative returns, though they have declined less than the category average.
- 1-year returns: ICICI Prudential (10%), Nippon India (10%), which is lower than the category average (13.3%).
- 3-year returns: Both ETFs have given 11% annualized returns, slightly below the category average of 12.4%.
- 5-year returns: Both ETFs have returned 15%, while the average category return is around 16%.
Key Metrics:
- Expense Ratios: ICICI Prudential (0.03%), Nippon India (0.04%)
- Tracking Errors: Both ETFs have an extremely low tracking error of 0.03, which is favorable for investors.
For moderate-risk investors looking for exposure to large-cap stocks with low expense ratios and tracking errors, both ETFs are excellent choices.
- Nifty Midcap 150 ETFs
The Nifty Midcap index has corrected by about 10%, making midcap ETFs an interesting investment avenue. Three notable ETFs in this category include:
- Mirae Asset Nifty Midcap 150 ETF
- Nippon India Nifty Midcap 150 ETF
- ICICI Prudential Nifty Midcap 150 ETF
Performance Overview:
- 6-month returns: Negative returns across all three ETFs, with the category average showing a small decline of 2.39%.
- 1-year returns: Mirae Asset (19%), Nippon India (19%), ICICI Prudential (18.25%), compared to the category average of 22%.
- 3-year returns: All three ETFs have returned around 19%-20% annually.
- 5-year returns: Nippon India has outperformed with a 27% return, beating the category average of 25%.
Key Metrics:
- Expense Ratios: Mirae Asset (0.05%), ICICI Prudential (0.15%), Nippon India (0.21%).
- Tracking Errors: Mirae Asset (0.05), ICICI Prudential (0.04), Nippon India (0.08).
Among these, Mirae Asset Nifty Midcap 150 ETF and ICICI Prudential Nifty Midcap 150 ETF are attractive options due to their lower expense ratios and tracking errors.
- CPSE ETF (Central Public Sector Enterprises ETF)
The CPSE ETF, which tracks a basket of 10 PSU (Public Sector Undertaking) companies, has corrected by 22% from its peak. This ETF provides exposure to large government-backed enterprises with strong fundamentals.
Performance Overview:
- 6-month returns: -14%.
- 1-year returns: +23%.
- 3-year returns: +29%.
- 5-year returns: +39%.
Key Metrics:
- Expense Ratio: 0.07% (very low).
- Tracking Error: 0.08%.
- Sector Allocation: Heavy exposure to Energy (65.5%), Capital Goods, and Infrastructure.
This ETF is suitable for investors looking to diversify their portfolios with PSU stocks and benefit from potential government-driven growth in these sectors.
Conclusion: How to Invest in These ETFs?
Given the recent corrections, these ETFs present attractive opportunities for long-term investors. However, investing should be done in a staggered manner rather than deploying all capital at once. A three-part investment approach—allocating funds at different market levels—can help mitigate risks.
Additionally, investors should assess their risk tolerance and investment horizon before selecting an ETF.
- Low-risk investors can opt for Nifty 50 ETFs.
- Moderate-risk investors can consider Nifty Next 50 ETFs.
- High-risk investors can explore Nifty Midcap 150 and CPSE ETFs.
By taking advantage of the current market correction and adopting a disciplined investment strategy, investors can optimize their portfolio returns over the long term.
Disclaimer: This content is for educational purposes only and is not intended as financial or investment advice. Please consult a qualified financial professional before making any financial decisions.