Does the Kotak Nifty Alpha 50 ETF make sense for investors?

Kotak Mahindra Asset Management Company Ltd has launched India’s first exchange-traded fund (ETF) based on the Nifty Alpha 50 Index, which tracks the performance of 50 stocks with high alphas in the past one year. Alpha, also referred to as ‘excess return’, is a term that measures the return earned by a stock above or below demanded by market for its risk class.

The new fund offer for the Kotak Nifty Alpha 50 ETF will remain open for subscription till 15 December.

Nilesh Shah, group president and managing director, Kotak Mahindra MF, said, “Our decision to launch Kotak Nifty Alpha 50 ETF comes at a time when the market has cooled down and valuations have eased.” As per the product presentation, the 50 stocks in the Nifty Alpha 50 Index are selected from the top 300 companies based on an average free-float market capitalization and average daily turnover for the last six months.

The security with the highest alpha in the index is assigned the highest weightage, which is capped at 5%.

The top five companies in terms of weightage in the Nifty Alpha 50 Index are Adani Total Gas Ltd at 4.99%, Adani Transmission Ltd (4.45%), JSW Energy Ltd (3.64%), Tata Elxsi Ltd (3.57%) and Adani Enterprises Ltd (3.19%).

In terms of returns, Nifty Alpha 50 Total Return Index (TRI) has delivered 83.8% gains on a one-year basis compared with 53.5% given by Nifty 50 TRI. Investors should note that mid-cap and small-cap stocks may tend to have a bigger weightage in this index. As per Amfi’s market capitalization, there were 15 large-cap companies holding a 29.7% weightage in Nifty Alpha 50 index compared with 23 mid-cap stocks having 46% holding and 12 small-cap companies having 24.93% weightage (as of June-end).

“It’s more of a strategy-based index rather than a broad-based index. The broad-based index is predominantly market capitalization-based strategy, but here, there is an element of identifying top 50 alpha stocks from a universe of 300 stocks. It is like an aggressive growth style fund, which targets higher alpha. If someone is entering thinking that this fund will be a typical index fund, that is not the case,” said Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth.com.

According to Chetanwala, since the fund is targeting alpha, higher the risk, higher the return mantra should be followed. “While this fund has a unique proposition when it comes to offering investment opportunities, it is meant for investors who have a high risk appetite or who would like to take more aggressive method of investing,” Chetanwala added.

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