Investing via indices, or passive investing, has accelerated rapidly over the past decade. As interest in index investing has grown, so has the nature and flavor of indices.
Starting from plain vanilla market capitalization-weighted indices designed to capture the market or a slice of the market, indices have expanded to include an array of investment themes, which are rules-based strategies labeled under the catch-all term ‘smart beta’.
The Indian market has kept pace with these international developments and Asia Index, the S&P BSE joint venture, has launched a number of indices under the category of smart beta.
However, the most unique use of indices was actually devised by the Government of India. With an aggressive disinvestment target of Rs 75,000 crore, it has to come up with an innovative idea to meet the goal. In the past, either a secondary share sale of a company or an IPO was either met with muted response or the set price was invariably second-guessed based on market conditions.
A few years ago, the government came up with the idea of bundling together a few of the disinvestment target companies in an index and selling the shares through an ETF.
A few companies were identified and the ETF provider, selected by the government, would buy and sell the shares as needed for the disinvestment process. There would be no open market share transaction and the sole purpose was to act as a vehicle of the disinvestment programme. This had several advantages. It was cost-efficient since the government could sell tranches of several companies at one go, and also sell several successive tranches over time. Investors could avoid exposure to risks in a single stock, which was there is a case of single share sale.
With the experience of the first effort, the government has become savvier and the second such ETF to come out of its disinvestment stable will have more new features. The bundle of stocks includes not just CPSE stocks but also SUUTI and PSU bank names. This makes the index much more diversified and well balanced along sectoral lines. It avoids concentration in a single stock or sector by putting in caps on the weight permitted for a stock or sector. The index also has the capability of adding new names over time as the government’s mandate is increased.
Back-tests the index show returns higher than the S&P BSE Sensex. This is a unique initiative being undertaken by the government not done anywhere else in the world. It is also testament to the many ways that indices are being used around the world and how they are serving the purpose of both investors and issuers.