DSP Mutual Fund launches DSP Nifty 50 Equal Weight ETF
The new fund offering (NFO) opens for subscription on October 18 and ends on October 29, after which it will be bought and sold on the stock exchange, the company said.
In an equal weight index, each stock it contains receives equal weight. For example, if the strategy is applied to Nifty 50, the Equal Weight Index will hold the same 50 companies as Nifty 50 and have a 2% weight for each company, unlike the current design of the market cap weight where some stocks get large weights like 9. -10% and many stocks in the bottom tail get only 0.3%.
This gives all companies in the index an equal chance to contribute returns rather than being too dependent on the top 10.
“DSP was the first to launch passive funds using the Equal Weight strategy in India and we are delighted to launch the first Nifty 50 Equal Weight tracking ETF index in the country,” said Kalpen Parekh, Managing Director and CEO of DSP Investment Managers.
“When we looked at this concept of equal weight indices globally, we noticed that over long periods of time, equal weighting tends to generate better returns than market cap weighted indices. This happens because all companies have the opportunity to participate rather than just a few, ”Parekh noted.
Parekh, however, added that such a strategy has its phase of underperforming when the economy’s earnings are polarized to select companies as in the past five years.
He added that in the long run, as good companies across all industries grow and create value, an equal weighting strategy gives significant weight to every company in the index.
“Equal weighting also ensures that the most over-owned sector at all times is derisked,” Parekh said.
Anil Ghelani, CFA, Head – Passive Investments & Products, DSP Investment Managers, pointed out that equal weight strategies take advantage of certain market inefficiencies caused by behavioral biases.
“Equal weighting takes advantage of certain market inefficiencies caused by behavioral biases, since the strategy is not affected by the excess of optimism in some stocks and the excess of pessimism in others. Such inefficiencies have helped the equal-weight index strategy outperform traditional index-based strategies based on market capitalization, ”said Ghelani.