PrimeInvestor Core and Satellite ETF Smallcase is a one-of-a- kind all-ETF portfolio. This portfolio is unique because it lets you reap the benefits of a low-cost strategy along with higher returns that comes from tactically managing your portfolio.
A Core & Satellite approach to investing typically uses passive funds for the core and uses active funds to build the satellite. But we’re turning this long standing concept on its head! With a growing universe of differentiated ETFs, it’s perfectly possible to build a satellite portfolio using just ETFs. So, our PrimeInvestor Core & Satellite ETF Smallcase portfolio takes advantage of the low-cost and ever-expanding range of ETFs to build a great, all-weather portfolio. Our job is to ensure the satellite is tactically managed for you even as we ensure your core is rebalanced where needed!
The core
The core of this Smallcase portfolio will consist of traditional market-cap based indices. These could be the Nifty 50, Nifty 100, Next 50, Nifty 500 or the Mid and Small Cap indices. It also includes gold as a hedge.
Market-cap based investing is a time-tested strategy that ensures you go with the collective wisdom of the market. There is no taking judgement calls here on which sectors or which strategies will do well and to that extent limits the risks of wrong timing.
Marketcap based investing works well as your exposure to the market-favoured stocks automatically moves up and weights to the less favoured ones reduce. This way, you keep in step with the market. In the core portfolio, we have used different indexes along the market cap curve to build the best exposure to market cap segments. The weights we allocate to the indices are such that you are able to capture adequate upsides as well as contain downsides in a bear market.
We have added gold in the core part of your portfolio to ensure that it lends some hedge to the otherwise equity-heavy portfolio.
The satellite
The satellite is the part of the portfolio where we seek to generate alpha by playing around with strategies, themes and sectors.
Strategy indices – also called factor indices or smart-beta indices – are NOT built based on market cap movement. Rather, a set of rules (based on the factors chosen) are drawn up and stocks satisfying those rules find a place in the index, with appropriate filters. So, there is an element of ‘choice’. The weight to a stock in such indices is decided by its score on the factors and not on its market-cap.
When an index is built on a single factor (or rule/metric) such as value, quality, or low volatility it is called single-factor investing. When the index is built using multiple factors – for example, low volatility plus alpha – it is called multi-factor investing.
Some of these strategy indices may be less tactical and more usable as a diversifier to the core. Others, such as value or quality, may be more tactical. So, this part of the satellite portfolio requires us to do make choices in terms of which strategy works best in a given market scenario.
Similarly, with the increasing list of sector and thematic indices – such as IT, auto, manufacturing, consumption, dividend yield and so on – we will pick those themes or sectors depending on the prospects. This section will be more dynamic and can change from time to time. But not all theme and sector indices have ETFs with adequate trading volumes. So, our choices will be restricted to the ETFs with good turnover.
We will also give cash calls with liquid/debt ETFs when necessary; when, for example, markets are overheated based on our internal indicators. But do note that the Core & Satellite ETF portfolio is not an asset allocated portfolio. It is an equity-focused portfolio to gain optimally in different market conditions. While we do have gold as part of the core, it is primarily to ensure downside containment and is not for asset-allocation purposes. Do ensure you have sufficient exposure to other debt options.
Why own the PrimeInvestor Core & Satellite ETF smallcase
Here’s why this portfolio is a must own:
- Ensures you earn what the market delivers, through broad marketcap based indices with some allocation to other asset classes to tackle equity market gyrations – the core.
- Get extra returns by shifting across different strategies, themes, and sectors that suit the prevailing market scenario to capture upsides – the satellite.
- Ensure you ride key themes and sectors at the right time to generate alpha or sometimes to even protect downsides.
- You get to do this at low costs with ETFs, instead of owning traditional active mutual funds.
Performance
PrimeInvestor’s Core and Satellite ETF Smallcase is meant to be dynamically managed based on market conditions and strategies and sectors in favour. Making changes in back-tested data will bring in hindsight bias. Hence, we provide below the historical returns of the present portfolio to provide an idea of the kind of performance this portfolio showcases against the benchmark Nifty 50 index.
Since many of the ETFs are less than 3 years old, we have taken the respective underlying indices that the ETFs reflect to calculate the returns of the weighted index that this portfolio will mirror.
The data below on rolling return statistics will tell you that the Core and Satellite Portfolio has comfortably beat the Nifty 50 almost all the time. The average 3-year rolling return shows an outperformance of over 4 percentage points. Its volatility is also marginally lower than the Nifty, despite having aggressive indices and sectors. The worst 3-year return is also superior to the Nifty.
The graph below shows how Rs 100 invested in the weighted index performed against the Nifty 50. You will see that the margin of outperformance has increased since the 2020 correction.
ETF universe and research methodology
Universe
- All ETFs listed on Indian exchanges
- Minimum track record of 6 months since launch of ETF
- Average daily traded value of at least Rs 10 lakh and traded on all days
Research Process
A quantitative system of ranking ETFs based on:
- Tracking error over different timeframes
- Expense ratio
- Turnover and days traded
- Deviation of market price from ETF NAV
ETF Screening
ETF shortlist drawn up based on performance consistency, extent of outperformance, and nature of returns of the underlying index over comparable broad market-cap based indices such as Nifty 50 or Nifty 500. Further, performance of closest comparable active mutual funds across categories analysed to check ability of passive strategy to deliver better. Final portfolio based on quantitative methodology and qualitative analysis on market cycles and themes, in addition to ETF performance metrics.
Weighting
At least 40-50% weights to the core section of the portfolio. Remaining weights to satellite indices, depending on their ability to generate alpha and limit downside in the portfolio.
Rebalancing
This portfolio will be reviewed every quarter for rebalancing. The portfolio will undergo a change when we introduce new themes/sectors or strategies based on changing market conditions and sector potential. We may also bring in newer ETFs in the core allocation or change their weights depending on prevailing or potential market phases. Sometimes, ETFs with higher turnover and lower tracking error may replace existing portfolio ETFs to stay with top quality ETFs. All of these changes will be done when we review and rebalance the portfolio on a quarterly basis. The portfolio may also be rebalanced between quarters when needed based on external events.
FAQs on PrimeInvestor Core and Satellite ETF Smallcase Portfolio
Can I buy only some ETFs in this portfolio as I own the rest?
This is a basket of ETFs - a weighted portfolio. For you to earn optimal returns from this portfolio, it is best that you buy it as a basket. This apart, it will help you rebalance easily and maintain the portfolio in an automated manner. The portfolio changes in the quarterly rebalancing review may see weight changes in existing ETFs as well as addition/exit of ETFs, especially in the satellite portion. Manually making these additions and weight changes yourself can become cumbersome.
What is the tax impact on the portfolio?
The taxation is the same as tax on individual ETFs. Equity ETFs sold within a year will be taxed at 15% on capital gains and those held for more than a year at 10% (after the first Rs 1 lakh in long-term capital gains for all equity gains). Capital gains on gold, international and debt/liquid ETFs, if any, will be taxed at your tax slab rate if held for less than 3 years and at 20% on capital gains after cost indexation if held for over 3 years.
What is the cost involved in buying this portfolio?
On the research side, you will be paying PrimeInvestor an annual fee as mentioned on the Smallcase portfolio page. On your brokerage platform, you will incur brokerage cost, securities transaction tax (STT) and demat charges, similar to buying and selling of any stocks/ETFs.
What returns should we expect from this portfolio?
This portfolio is benchmarked against the Nifty 50 index. However, like any other equity product, this portfolio too will go through ups and downs. Do not expect positive or even double digit returns year after year. We do not provide any assurance or guarantee of returns on the portfolio.
How should I invest in this portfolio - through lump sum or SIP?
As a diversified long-term portfolio, we encourage you to do SIPs in this portfolio if possible. If you decide to make a lump sum investment, make sure you average on market falls or at least invest at multiple market levels. Have a time frame of not less than 7 years for this portfolio to deliver.
Can I replace my existing active mutual fund portfolio with this smallcase?
This portfolio is not a fully asset-allocated one. So, this cannot entirely replace your active funds. Besides, if you have good performing active funds, there’s no reason to replace them entirely. You can use PrimeInvestor’s MF Review tool to know if your active funds are a buy/hold/sell. Instead, you can use this portfolio as your equity portion of any new long-term goals that you may have.
Is there a cap or maximum amount that I can take exposure to?
There is no maximum limit to this portfolio. However, make sure you have other investments set out for your near-term goals as this portfolio is not suitable for short-term periods of less than 5-7 years. Since this is predominantly an equity portfolio, ensure you have adequate exposure to other asset classes such as debt.
Does PrimeInvestor offer other Smallcases?
Yes, PrimeInvestor offers a themed stock portfolio - PrimeInvestor Financial Disruptors. You can view details of the same : PrimeInvestor Financial Disruptors smallcase portfolio.
This Smallcase portfolio has delivered negative or poor returns since I bought it. Can I get a refund?
No, there are no refunds. Equity investing is risky and will see declines from time to time. These are suitable only if you can stay invested over the long term.
