Reasons Not To Buy CPSE ETF FFO : Price Risk
You’ll put your money now. You will get allocations around February first week or so. If in that time there is a crash of the stock price, you will get the January price which can be higher. So you have the price risk for a few weeks.
Secondly, look at the CPSE February Future price. It’s at a Rs. 44 discount to the stock price. (Index at 2489, Feb future at 2445). They actually expect the index to dip after the units are allocated – precisely because people will sell.
That means even if you got the units at a 5% discount, you carry the price risk till the ETF units are given to you. And then, when you sell, hundreds of people like you will also sell, bringing the price down further (as the future price seems to expect).
Also note that there are some transaction charges of Rs. 100 to Rs. 150 per application that will apply anyhow.
Portfolio: Heavy on Energy/Oil and Gas
The CPSE Index is 1/4th ONGC. And then, 1/5th Coal India. It’s got one logistics company (Concor), two engineering companies and the rest are in the energy or power sectors.
While the ETF has done reasonably well with a return of 30% in nearly three years, you should understand that most other indexes have done even better. The CPSE index hasn’t even crossed its own high in 2014!
View: Not Worth The Arb Risk, and Boring Portfolio
Carrying price risk for a few weeks is not very useful. You can’t even hedge using futures, as the future seems to quote 2% below current levels (this may change in this week). Plus, with a budget in the middle (Feb 1) it’s not great to keep unknown risks on.
Another reason you can’t hedge is that you can’t easily be assured of Rs. 500,000 worth units, which is how much you need for one future to properly hedge.
A 5% cushion is nice, but not nice enough unless you love the underlying stocks.
The portfolio isn’t very interesting to hold for the longer term. The ETF mechanism ensures that the stock ownership isn’t easily privatized so the government isn’t actually freeing these companies. But if you like them, then using the ETF may be a better way than buying each one individually.