ICICI Pru MF Announces Launch of Auto ETF

How about a low cost method of participating in a portfolio of automobile stocks? For investors who have been looking for such an opportunity, there may be an answer just round the corner. ICICI Prudential Mutual Fund is launch the first Auto ETF, benchmarked to the NSE Auto index, with a low cost structure for investors to participate.

The new fund offering (NFO) of the ICICI Pru Auto ETF will open for subscription on 05th January and close on 10th January. Like any ETF, this fund will not offer daily purchase or redemption at NAV based prices. Instead, these ETFs will be listed on the stock exchanges and investors can buy and sell through their trading account and hold in demat accounts.

To that extent it will be like any other existing index ETF, the only difference being that the returns on the Auto ETF will depend solely on the fortunes of the automobile industry. If the auto industry does well, then the ETF also does well. It is largely a play on the expectation that after nearly 2 years of struggle with the pandemic, demand shift and microchip shortage, the outlook should improve for the auto sector.

The ETF will offer a low cost methodology of participating in the auto segment in India. For example, typically index ETFs have had a total expense ratio (TER) of around 0.2% to 0.3%, which makes them substantially more economical compared to actively managed funds. The low cost also contributes to boosting the returns in most ETFs.

The auto sector looks interesting, according to analysts for 3 reasons. Firstly, there is a revival expected as demand for autos pick up once again. Secondly, there is a quiet shift to electrical vehicles (EVs) that is happening and that is also boosting prospects. Lastly, India’s auto industry is already the third largest in the world and has huge export potential.

The broad rule is that no single stock in the ETF shall be more than 33% of the portfolio value and the combined weight of the top-3 stocks in the portfolio will not exceed 62% of the portfolio value. If there is a deviation, it will be corrected in the semi-annual rebalancing that will be done in March and September each year.

The Nifty Auto index has been a smart performer over a longer time frame. For example, if you look at the last 11 years and measure in terms of annual returns, then the Auto Index has outperformed the Nifty in seven out of these eleven years. That is surely a good logic for passive investors to bet on.

Also Read: 

Best Electrical Vehicles (EV) stocks to buy.