Passive investing with tnwd in factors

Mirae Asset’s ETF o‡ers a blend of momentum and quality in mid/small-caps

There are has been considerable retail investor interest around mid- and small-caps – both stocks and funds. These funds – passive and active – are suitable for very long-term investors with a 10-year horizon and a robust risk appetite.

Now, a variant is introduced to the combined mid- and smallcap index by including a couple of factors into it.

Mirae Asset has rolled out a new Nifty Mid Small Cap 400 Momentum Quality 100 ETF (exchange traded fund) that is open for subscription till May 17.There would be fund of funds rolled out on the same underlying index and it would be open from May 10 to May 24.

WHAT’S THE FUND ABOUT?

Momentum factor’s underlying assumption is that stocks that are continuously rallying will continue to do so for the foreseeable future. Quality is a smart-beta factor that focuses on companies with large profit margins, high return ratios, low leverage and stable cashflows.

The parent Nifty Mid Small Cap index has 400 stocks – 150 from the mid-cap universe and 250 from the small-cap segment. In the Nifty Mid Small Cap 400 Momentum Quality 100 index, there would be 50 stocks each from the mid- and small-cap segments.

From the parent index, stock exclusion, selection and weightage criteria are set to arrive at the factor index. The exclusion criteria are listing history, circuit filter breaker, pledged promoter holdings, average low daily trading value and low turnover ratio. The quality factor has return on equity, debt to equity, and earnings per share variability as criteria. For the momentum factor, six-month returns and risk, and 12-month returns and risk are applied as criteria.

A final set of stocks with suitable weightage (capped at 5 per cent per share) based on a composite z-score and free-float market capitalisation of companies. The index constituents are reviewed once in six months.

FOR INVESTORS

The graphic shows the outperformance of the Mid Small Cap factor index over other benchmarks.

Mirae Asset has a fairly robust track record as a fund house managing equity schemes. This ETF is the first passive fund tracking this factor index.

Investors who can stomach volatility and also wait it out for two smart-beta factors to play out to make gains in their portfolio can consider the fund. Even so, investors must consider it for the satellite part of their portfolio and deploy only very small sums or take the SIP route.

Others can wait for the fund to develop a track record.