SBI Mutual Fund launches Smart Beta ETF

Exchange traded funds (ETF) are innovative financial products launched sometime in 1993, 18 years after the first index fund was launched. Then came the changed avatar of ETF, known as smart beta. The first smart beta ETFs was launched in the year 2003. All these ETFs and index funds provide exposure to an index or a basket of securities that trade on the exchange like a single stock.
 
SBI Mutual Fund, recently launched SBI ETF Quality, its first smart beta offering. It is an open-ended fund that will be tracking Nifty 200 Quality 30 index. The fund would be investing a minimum of 95 per cent in the companies under Nifty 200 Quality 30 ranked by their quality scores, while the residual 5 per cent will be invested in money market instruments. The NFO opens for subscription on November 26 and closes on December 3. The minimum subscription amount is Rs 5,000 and in multiples of Re. 1 thereafter.
 
According to the research paper published by NSE Indices, Nifty 200 quality index includes top 30 companies from its parent Nifty 200 index, selected based on their quality scores. The quality score for each company is determined based on return on equity (ROE), financial leverage (Debt/Equity Ratio) and earning (EPS) growth variability analyzed during the previous five years. The weight of each stock in the index is based on the combination of stock’s quality score and its free float market capitalization. The index is rebalanced semi-annually. Nifty 200 Quality 30 portfolio has outperformed its parent NIFTY 200 index in most calendar years. On the calendar year basis, from 2005 to 2018, Nifty 200 Quality 30 portfolio has outperformed Nifty 200 in 9 out of 14 calendar years and Nifty 50 in 10 out of 14 calendar years.
 
As ETFs are listed on the exchange, costs of distribution are much lower and the reach is wider. These savings in cost are passed on to the investors in the form of lower costs. Furthermore, exchange-traded mechanism helps reduce minimal collection, disbursement and other processing charges. The structure of ETFs is such that it protects long-term investors from inflows and outflows of short-term investors. This is because the fund does not bear extra transaction cost when buying/selling due to frequent subscriptions and redemptions.