Analysis of Nifty 100 Low Volatility 30 Index
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
(Please see update 15Oct2023 at the end of the blog)
This is an analysis of Nifty 100 Low Volatility 30 Index and ETFs based on this 'smart beta' index. Smart beta is an investment strategy that is a blend of passive investing and active investing.
1. Smart beta strategies
Smart beta investing gained global popularity in the past decade. Billions of dollars are invested, across the globe, in this strategy. This is a niche area in a broad spectrum of index funds and exchange traded funds (ETFs).
Beta is a statistical tool, which
gives one an idea of how a stock price will move in relation to the market. Beta
represents fluctuations in the stock or asset price in relation to market returns. A stock with a greater value of one is more volatile than the benchmark index.
If a stock’s beta is one, it indicates its price is closely following the benchmark. A low-beta stock will rise less than
the market on the way up and lose less on the way down. Similarly, a high-beta stock will rise more than the market and also fall more than the market.
Take for example, a stock like Torrent Pharmaceuticals which has a beta of 0.21 -- meaning the stock is likely to rise only 0.21 percent when a broad market index, say Nifty 50, goes up by 1 percent or supposed to fall only 0.21 percent when a broad market index loses 1 percent. So, the stock price of Torrent Pharmaceuticals is considered less volatile.
At the other end of the spectrum, take the stock of Rail Vikas Nigam Ltd (RVNL) with a beta of 1.69 -- meaning the stock is likely to rise by 1.69 percent when Nifty 50 goes up by 1 percent or supposed to fall as much as 1.69 percent when Nifty 50 falls by 1 percent. So, the RVNL stock is considered more volatile compared to the average market.
Smart beta indices are constructed using weighing schemes different from traditional stock indices. Traditional stock indices are market capitalisation-weighted. Smart beta indices tend to use alternative weighting schemes such as volatility, quality, value, momentum and size.
Smart beta strategies are supposed to provide lower risk / volatility and better returns -- thus giving superior risk-adjusted returns to investors. Whether or not smart beta theme works is moot, because the evidence for their superior performance is patchy.
(the blog continues below)
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2. Smart beta in India
Assets held by ETFs and index funds based on smart beta indices are tiny compared to popular ETFs and index funds based on Nifty 50 and Sensex.
There are various smart beta indices in India, most of them are from NSE India (Nifty Indices) and a few are from BSE Limited. Some of such indices are:
1) Nifty 100 Low Volatility 30 (30 stocks with lowest volatility that form part of Nifty 100 index),
2) Nifty 200 Quality 30 (30 stocks with highest quality in Nifty 200 index),
3) Nifty 200 Alpha 30 (30 stocks with highest alpha in Nifty 200),
4) Nifty 50 Value 20 (20 stocks considered highest 'value' from Nifty 50),
5) Nifty Midcap 150 Quality 50 (50 highest quality stocks in Nifty Midcap 150),
6) Nifty 200 Momentum 30 (30 stocks with highest momentum in Nifty 200) and
7) BSE Low Volatility Index (30 least volatile stocks in BSE LargeMidcap index).
From the above, let us examine Nifty 100 Low Volatility 30 index and ETFs based on the index.
3. Nifty 100 Low Volatility 30 index
Nifty 100 Low Volatility 30 index is an equity index that tracks the performance of 30 least volatile stocks in the Nifty 100 index. Nifty 100 Low Volatility 30 index can be called as child index, because it is selected from its parent index, Nifty 100. There are 30 stocks in the index.
4. How are the 30 stocks selected?
The
stocks forming part of Nifty 100 are eligible for inclusion in the Nifty 100 Low Volatility 30 index. Stocks
are selected based on their volatility. Volatility is calculated as the
standard deviation of daily price returns (log normal) for the past one year.
Eligible
stocks are then ranked based on their volatility score, with stocks having
lowest volatility getting a rank of one. The top 30 ranked stocks with least
volatility form part of the Nifty 100 Low Volatility 30 index.
The selection of stocks is decided by a committee constituted by NSE Indices Limited (a subsidiary of National Stock Exchange of India Ltd or NSE).
5. Portfolio characteristics and sector weights (31Aug2023) >
As can be seen from the above image, the index is rebalanced quarterly and is calculated in real time. Its launch date is 08Jul2016 with a base date of 01Apr2005.
Top three sectors, as on 31Aug2023, are FMCG (7 stocks), healthcare (4 stocks) and financial services (4 stocks) -- with a total weight of 51.5 percent. The index is fairly diversified across sectors.
Compared to Nifty 50 and Nifty 100 indices, this Low Volatility index provides better diversification in terms of sectors. But Nifty Next 50 index offers superior portfolio diversification compared to Nifty 100 Low Volatility 30 index.
6. Top 10 stocks (31Aug2023) >
The Nifty 100 Low Volatility 30 index provides better diversification compared to Nifty 50 (top stocks have 58.4 percent weight) and Nifty 100 (top 10 stocks have 50.2 percent weight).
But Nifty Next 50 index with 30.8 percent weight for top 10 stocks provides better diversification compared to this Low Volatility index.
7. Returns and fundamentals (31Aug2023) >
The index's price-earnings (P/E) ratio is 23.8, price-book value ratio is 5.2 and dividend yield is 1.7.
8. List
of 30 stocks and their weights (31Aug2023) > Table 1 >
It may be noted there are 31 stocks in the index as on 31Aug2023 -- the one extra stock is Jio Financial Services. As Jio Financial Services was demerged from Reliance Industries last month, the stock forms part of the index temporarily.
The stock will probably be removed from the index by the end of
30Sep2023, so that the index will continue to have 30 stocks.
There are four ETFs based on Nifty 100 Low Volatility 30 index -- these are from: ICICI Mutual Fund, Kotak MF, Mirae Asset MF and HDFC MF. From these four, I've chosen the ETF from ICICI stable because it has the highest assets and the longest track record of more than six years.
9. ICICI Prudential Nifty 100 Low Volatility 30 ETF
The portfolio stocks and their sector weights in the ETF are already discussed above, while discussing the underlying index -- so, I'm not repeating the details here.
10. Assets and expense ratio
The ETF has assets under management (AUM) worth Rs 1,900 crore as of 31Aug2023, with an expense ratio of 0.41 percent. The expense ratio is more or less stable in the past two years, even as its assets are swelled by almost four times in the same period (table 2 below).
However, compared to assets of Rs 1.59 lakh crore of SBI Nifty 50 ETF (expense ratio is only 0.04 percent), the assets of this niche ETF are tiny. Of course, ETFs based on Nifty 50 index have the advantage of getting EPFO investments regularly.
Compared to ETFs based on most popular indices, like, Nifty 50 or Sensex, the expense ratio of ICICI Pru Nifty 100 Low Volatility 30 ETF is much higher.
Table 2 >
11. Risk and return comparison
The following tables 3, 4 and 5 provides details of assets, inception date, fund manager, trailing returns (both short and long term) and risk ratios such as, Sharpe ratio, Sortino ratio and Beta. The data are from rupeevest.com and as on 12Sep2023.
The tables also provide data about comparison with other smart beta indices and mainstream indices, like, Nifty 50, Nifty Next 50 and Sensex. The data also include comparison with foreign stock indices.
On a one-year, two-year and five-year trailing returns basis, ICICI Pru Nifty 100 Low Volatility ETF has outperformed its parent index ETF (LIC MF Nifty 100 ETF). But on a three-year basis, it underperformed the parent index (Nifty 100).
Compared to other smart beta ETFs, such as, Nifty Alpha Low Volatility 30, Nifty 200 Quality 30 and Nifty 50 Value 20, the ICICI Pru Nifty 100 Low Volatility ETF's performance is mixed -- in the sense, in some years, it gives superior returns and in others inferior.
Compared to Nifty 50 ETF also, the ICICI Pru Nifty 100 Low Volatility 30 ETF's record is mixed.
The Sharpe ratio for the ETF is much higher compared to Nifty 100 ETF (1.3 versus 0.7) and Nifty 200 Quality 30 ETF (1.3 versus 1.1). But its Sharpe ratio is lower compared to that of Nifty Alpha Low Volatility 30 ETF (1.3 versus 1.4).
Sharpe
ratio is a measure that describes the return earned per unit of risk
taken to earn the returns. The higher the ratio, the better for the
investor.
The other data in tables 3, 4 and 5 (please click on the images to view better) are self-explanatory.
12. Liquidity / Volumes
An important factor while choosing an ETF is volumes traded on stock exchanges. As you know, ETFs are traded on stock exchanges in real time (in contrast, index funds are not traded on stock exchanges, one needs to buy them directly from mutual funds).
Table 6 > 
Table 6 provides details of volumes of the ETF for the past three years. The three-year data are bifurcated into 12 quarters, each quarter starting/ending from/in the middle of a month; each quarter has 62 trading days; and raw data are from 14Sep2020 to 11Sep2023.
Table 6 provides details of volumes of the ETF for the past three years. The three-year data are bifurcated into 12 quarters, each quarter starting/ending from/in the middle of a month; each quarter has 62 trading days; and raw data are from 14Sep2020 to 11Sep2023.
Only data from NSE India is considered for the analysis -- data from BSE Limited are ignored as the BSE volumes are low.
The table gives details of total volumes, daily average volumes, minimum / maximum daily average volume on a single day, number of trades and value of volumes for each quarter.
The average daily volume improved from 54,325 in Sep-Dec2020 quarter to 117,864 in Jun-Sep2023 quarter -- it may be noted the daily average volumes in 2021 and 2022 were much higher.
The average daily volume (value) improved from Rs 55 lakh in Sep-Dec2020 quarter to Rs 189 lakh in Jun-Sep2023 quarter.
Table 7 provides the data for the three-year period from Sep2020 to Sep2023 (the same data as presented in table 6, but on aggregate basis) >
13. Action Button
Ultimately, any financial analysis should result in investment action. So, should retail investors consider the ICICI Prudential Nifty 50 Low Volatility 50 ETF for investment?
ETFs have a long history since 1993, when Standard & Poor's started SPDRs (pronounced spiders) or Standard & Poor Depository Receipts. The first ETF launched by S&P was based on S&P 500 index.
As detailed in SPIVA reports every half-year, active funds fail
to beat passive funds, due mainly to higher expenses of active funds,
index hugging and inability of active managers to hold superior and
differentiated investment strategies.
Passive funds (index funds and ETFs) offer better opportunities for majority of investors, who do not have time and required expertise to analyse and monitor the financial investments.
As we have seen, ETFs based on smart beta indices are a niche area and are suitable only for a small group of investors, who need exposure to specific investment strategies, who have expertise and who have high risk appetite to stomach the market volatility.
The following six criteria area are important while choosing ETFs and they are: suitability, portfolio diversification, size of assets, expense ratio, tracking error and liquidity.
a) Suitability: First of all, any investment decision must start with the question whether a particular investment is suitable to the individual investor, be it, a small retail investor and big investor with high net worth. This depends on each individual.
In my opinion, a majority of small retail investors can ignore the ICICI Prudential Nifty 50 Low Volatility 30 ETF because its return and risk ratios are mixed (para 11 above).
b) portfolio diversification: The purpose of a passive fund is defeated if it fails to provide decent portfolio diversification. Many ETFs suffer from high concentration risk.
As detailed in paras 5 and 6, the ETF offers superior portfolio diversification to ETFs based on Nifty 50 and Nifty 100 indices, based on both stocks and sectors. Most of these stocks and giant- and large-caps.
However, the ETF's underyling stocks, like, Sun Pharma, ITC, Larsen & Toubro, Dabur India, Asian Paints, Marico, Hindustan Unilever and Torrent Pharma look expensive on a forward price-earnings (P/E) ratio basis.
c) size of assets - the ETF has Rs 1,900 crore assets under management (AUM), good enough size from retail investors' viewpoint (para 10 above).
d) expense ratio: The superiority of ETF investing comes mainly from its lower costs, that is, lower expense ratio. Compared to Nifty 50 ETFs, this ETF has higher expense ratio at 0.41 percent, as detailed in para 10 above.
e) tracking error: Tracking error is a statistical tool that denotes the difference between the net asset value (NAV) as declared by the mutual fund daily* and its price on the stock exchanges.
Tracking
error shows how closely the ETF is able to track the performance of the
underlying index. A lower tracking error indicates that the ETF is able
to match the performance of the underlying index with a smaller
deviation.
The lower the error, the more desirable the ETF from the investor's viewpoint.
As prices on a stock exchange are dynamic in nature, depending on investor interest and liquidity, ETF prices differ from its NAV, which is the per unit value of the ETF's underlying assets.
The ETF's tracking error is 0.04 percent as on 31Aug2023; this is on a par with ETFs based on Nifty 50, Sensex and Nifty 100 indices.
(* it may be noted mutual funds should declare intra-day or indicative NAV or iNAV of ETFs on a continuous basis, in 15-second intervals, on stock exchanges on all trading days)
f) liquidity: To know whether a stock or an ETF offers liquidity, one needs to analyse trading volumes on the stock exchanges.
Volumes of the ETF
are decent enough for small / retail investors (para 12 above).
But the volumes
are not enough for big / institutional investors (however, they have the
option of buying ETF units directly form the mutual fund via a
mechanism called 'creation unit').
14. Finally
Risk and return ratios are discussed in para 11 above. After the index was introduced, it was claimed that the Low Volatility index provided superior return and risk ratios (back-tested results), offering superior risk-adjusted returns.
But the actual record of the ICICI Prudential Nifty 100 Low Volatility 30 ETF is patchy, as discussed in para 11 above. While the ETF scores well on parametres of portfolio diversification, size of assets, tracking error and liquidity, it scores poorly in terms of cost and risk / return ratios.
One could have considered the ETF if the expense ratio were to be reduced to less than 0.20 percent, as the ETF offers good liquidity and better portfolio diversification.
In my opinion, many retail / small investors are better off sticking to ETFs based on broad market indices, such as, Nifty 50, Nifty Next 50, Sensex or BSE 500.
Equity investments are high risk for people who cannot tolerate sharp movements in stock prices.
This blog on the ETF should not be considered as investment advice. This is just for educational purposes. The author does not have any position in the ETF.
(P.S.: sorry folks, though I started writing the blog on 12Sep2023, I could complete the blog only on 16Sep2023)
- - -
P.S.: The following are added after the above blog was published on 12Sep2023:
Update 15Oct2023: Changes during Sep2023 >
As expected, Jio Financial Services was out of the Nifty 100 Low Volatility 30 index in Sep2023. And during Sep2023, Bosch Ltd was included while Infosys was excluded from the index.
As a result, auto sector share increased to 9.3 percent, while that of IT sector decreased to 10 percent in Sep2023.
The AUM of the ICICI Pru Nifty 100 Low Vol 30 ETF is Rs 2,022 crore and its NAV is Rs 162.48 as on 30Sep2023.
The stocks and sectors of the ETF as on 30Sep2023 are >
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References:
Nifty 100 Low Volatility 30 Index white paper 21Jun2018
N100 LV30 Index methodology document (Jul2023 - pages 111 to 112)
Nifty Indices - N100 LV30 - PDF for Aug2023
ICICI Prudential Nifty 100 Low Volatility 30 ETF (NSE weblink)
Scheme Information document or SID (26Apr2023)
Key Information Memorandum or KIM (31Mar2023)
Rupee Vest MF comparison (factsheet, snapshot, historical changes to PF, etc.)
ICICI Direct quote (symbol ICIN30) - volume information
ICICI Direct weblink
ISIN details from NSDL
Historical NAV of the ETF - AdvisorKhoj
Comparision of all passive funds (equity ETFs and equity index funds) VR
Comparison of Low Volatility, Alpha Low Vol, Quality 30, Value 20 and Nifty 50 ETFs Morningstar
Comparison of Nifty 50 Equal Weight index, equal weight ETF, Low Vol, Nifty 50 index and Nifty Next 50 index funds Morningstar
Compare funds Nifty 50 equal weight index, Nifty 50 index, Nifty 50 BeES, Nifty Junior BeES, Nifty Next 50 index MS
Compare funds Hang Seng BeES, Nasdaq 100 ETF, Nifty Midcap 100 ETF, Nifty 100 Equal weight index and CPSE ETF MS
Comparison of Low Vol, Momentum 30, Quality 30, Nifty Next 50 and Nifty 50 index funds Value Research
Comparison of Nifty 50 Equal Weight, Nifty 50, Nifty Next 50, Nifty 500 and Value 20 index funds Value Research
Comparison of Nifty 50 equal weight, Nifty 50, Nifty Next 500, Nifty 500 and Nifty 100 equal weight index funds Value Research
Comparison of Momentum 30, Nifty 50 Equal weight, Nifty Next 50, Nifty 500 and Value 20 index funds Value Research
Comparison of Nifty 50, Nifty 50 Equal Weight, Nifty Next 50 and Nifty 500 index funds Value Research
ICICI MF factsheets and portfolios (includes archives)
NSE Market Watch - Exchange Traded Funds / ETFs
Nifty Passive Insights - quarterly reports (archives too can be accessed) -- Apr-Jun2023 PDF
Nifty Indices - NSE Indices factsheets
Nifty Indices - NSE Index Dashboard (archives) - Aug2023 PDF
Nifty Indices - Index Reconstitution Calendar
Nifty Indices - Index Methodology
Nifty Indices - Research papers
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
CFA Charter credentials - CFA Member Profile
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
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