NFTY: Equal Weight Is The Best Weight For Indian Stocks

India’s ruling political coalition, led by Prime Minister Narendra Modi’s Bharatiya Janata Party (or the ‘BJP’), is out with a new manifesto (“Modi’s Guarantee 2024”) for this year’s general elections. Unlike the populist stance taken on by the key opposition party, the Indian National Congress, the lack of election ‘freebies’ is notable; instead, the incumbent government has opted for a more fiscally responsible path, which should keep sovereign bond yields and the currency well-supported.

There was plenty for equity markets, too, with the BJP emphasizing more policy continuity, albeit with more scale and a faster pace of policy execution. This means more capex for infrastructure build out and manufacturing incentives, as well as a bigger reform push (think judicial, land, governance, etc.) on the path to achieving ‘developed economy’ status by 2047.

With all signs pointing to five more years of BJP rule, doubling down on what has worked in the last five years makes the most sense, in my view. Within the large-cap universe, this means an equal-weighted approach via First Trust India NIFTY 50 Equal Weight ETF (NASDAQ:NFTY) should continue to yield outperformance over more straightforward Nifty 50 or MSCI India trackers. In line with my prior coverage, I remain upbeat on NFTY into election season.

NFTY Overview – The Only Equal-Weighted Play on Indian Large-Caps

The First Trust India NIFTY 50 Equal Weight ETF is currently the only US-listed passive vehicle with an equal-weighted approach to Indian equities. This means NFTY allocates the same weight to all fifty stocks in India’s flagship Nifty 50 index (subject to quarterly rebalancing) – in contrast to the capitalization-weighted approach (i.e., each component allocated % weights based on their respective market caps) taken by larger trackers like the iShares India 50 ETF (INDY) and the iShares MSCI India ETF (INDA).

The key drawback is that equal-weighted NFTY isn’t anywhere near as popular, as evidenced by its smaller asset base and thinner liquidity relative to INDY and INDA. That said, the fund is improving in this regard, having seen another quarter of very strong managed asset growth to $195m (up from $142m prior). This, in turn, bodes well for a narrower median bid/ask spread going forward (currently ~38bps vs ~2bps for INDA and ~12bps for INDY). NFTY also isn’t as competitive on fees vs INDA, though it does offer a ~9bps fee discount to capitalization-weighted Nifty 50 tracker, INDY.

NFTY Portfolio – Relative Diversification Shines Through

The equal-weighted approach by NFTY continues to be reflected in its portfolio composition, which screens very highly on diversification relative to capitalization-weighted alternatives. Financials, for instance, is a lower 22.2% allocation – well below INDY (33.7%) and INDA (24.6%). Other notable sector differences relative to the Nifty 50 are NFTY’s relative overweights to Consumer Discretionary (14.1%), Materials (12.5%), and Health Care (9.7%).

As for the single-stock breakdown, NFTY is spread evenly across fifty constituents, though recent outperformers like aluminum and copper manufacturer Hindalco Industries, as well as automotive companies Mahindra & Mahindra and Eicher Motors, command slightly higher weightings. By comparison, the capitalization-weighted INDY over indexes to blue-chip franchises like HDFC Bank (HDB) (11.8%) and Reliance Industries (RLNIY) (10.2%). Equal-weighted NFTY also allocates a higher % to BJP-linked names like Adani Enterprises (ANNRY) and Adani Ports and Special Economic Zone Limited (ANRTY), as well as other post-election beneficiaries, so this ETF has a lot more ‘beta’ to an election victory for the incumbent government.

NFTY Performance – Well-Positioned to Capture Election Year Upside

Despite its relatively higher cost (fees and execution), NFTY more than makes up for it with performance. A big reason for this is that the NIFTY 50 Equal Weight index it tracks has delivered around 340 basis points of additional returns per year over the last five years. Unlike, for instance, US equities, where upside is typically concentrated around a handful of stocks, earnings growth in India is a lot more democratized; hence, diversification pays off here.

Now, the fund doesn’t track its index quite as well as conventional Indian ETFs (due to capital gains, transaction costs, currency fluctuations, etc.), but NFTY investors still come out ahead across all relevant timelines. Specifically, over the last five years, NFTY has grown its net asset value at +10.5% annualized – by comparison, INDY and INDA have returned +8.4% and +9.6%, respectively. The outperformance tends to widen in bull markets (NFTY up +34.9% vs. INDY at +22.7% and INDA at +31.2% over the last year), so in an election year, historically a great time to be long equities, NFTY looks poised to outpace its capitalization-weighted peers, yet again.

Equal Weight is the Best Weight for Indian Stocks

There’s no shortage of ways to play Indian large-caps, but of all the US-listed trackers, NFTY stands out for its equal-weighted approach. If recent polling and the incumbent government’s new manifesto are anything to go by, investors look set for more of the same policy-wise, just with greater scale and more aggressive execution. Against this backdrop, doubling down on what has worked investment-wise makes a lot of sense; given the outperformance of equal-weight over capitalization-weight within the large-cap ETF universe, NFTY screens attractively ahead of five more years of BJP rule.