Best factor (smart beta) indices 2024 | How to get more out of index investing

[Music] there is a lot to love about index investing it's simple the costs are low and you need to spend less time managing them and all this with reasonably good returns but it comes with two significant challenges first the maximum you can earn is what index and in effect the markets deliver and second your portfolio will fall as much as the markets so the question arises can you invest in index funds and yet get better returns than markets and control the downside the answer is yes thanks to factor investing hello and welcome to Ed money's YouTube channel today we will talk about Factor investing and how it can make a difference in the performance of a passive portfolio now Factor investing may look like A New Concept but it's not as we will discuss it shortly we will also see if there are any Factor indices that come out on top and are worth adding to your portfolio so watch this video Until the End to get the most out of it but before we start an important update the tax saving season is going on and the 8 money app and website provide you all major tax saving options LSS funds NPS life and health insurance in one place you can invest without any paperwork and get instant proofs all right back to the video let's begin with a short introduction to factor [Music] investing Factor investing is choosing Investments based on specific criteria that are known to impact portfolio performance now this performance we're talking about doesn't necessarily have to be returns it can be better diversification or less volatility or something else as well now some of the most famous factors are quality value size momentum and low volatility now the names of these factors give you an indication of what they do for instance the quality Factor seeks to make investments based on specific quality criteria the size Factor select Securities based on certain size and so on now factors need not be only related to style of investing they can also be related to economic criteria such as inflation rate GDP growth industrial production Etc now typical application of factors in investing is smart beta smart beta means the construction of indices based on one or more factors now indices tend to be based on market capitalization and free float smart beta investing changes that orientation by infusing certain factors into the index Construction in a way it combines active and passive investing approaches Let me Give an example you must have all be aware of nifty50 it's among the most popular indices that track the largest and most liquid Indian companies now when certain value criteria were applied to the nifty50 and 20 stocks were picked from it the nifty 50 value 20 index was obtained it's a factor or smart beta index another example is the Nifty 200 quality 30 index it selects 30 quality stocks from the broader the Nifty 200 basket of stocks based on certain criteria now Factor investing pick stocks as per preset criteria so Factor indices are very much passive instruments as well in many cases you can call them modified versions of more mainstream indices now these modified indices are meant to do better than their parent indices in terms of returns or diversification or volatility Etc but does it really happen are factor indices always better than their parents or the closest mainstream peers that's what we will try to find out now and in the process we will tell you the best Factor indices out there so keep watching but before I proceed let me request you to subscribe to this channel if you aren't already a subscriber and don't forget to click on the Bell icon so that you never miss a video from [Music] us there are as many as 35 Factor indices mentioned on the n's website however not all of them are useful from an investment perspective that's because many of them are not investable that is no funds are available for them the trading volumes are inadequate or there isn't sufficient history and data which makes their analysis difficult now there are just seven indices that make the cut you can find their names on the screen we will talk about the winners in Greater details later for now let me give you a quick overview of these seven indices the Nifty Alpha 50 index picks 50 stocks from the top 300 companies by free float market cap based on their Alpha out performance the Nifty Alpha low volatility 30 index picks 30 stocks from the Nifty 100 and Nifty mid 50 based on their Alpha and volatility the nifty 50 value 20 picks 20 value stocks from the nifty 50 the Nifty 100 low volatility 30 index picks 30 low volatility stocks from Nifty 100 the Nifty 100 quality 30 is on similar lines but it picks 30 quality stocks finally the Nifty 100 equal weight and nifty 50 equal weight indices have the same components as the Nifty 100 and the nifty 50 but they are equally weighted so all the stocks carry the exact weights unlike their parents which have more weights assigned to the larger and more liquid stocks let's now analyze these seven indices and find out the best among them let's first talk about returns we will use a metric called average rolling returns here it is obtained by averaging all instances of returns for a certain period for example if it's average 5year rolling returns we will average all instances of 5year returns over a period span that's what makes Rolling returns a comprehensive and reliable metric for the returns picture all right let's consider the average fiveyear rolling returns of the seven Factor indices and their Benchmark and parents for the Nifty Alpha 50 and the Nifty Alpha low volatility there isn't an obvious parent but because these two indices take exposure to large and midcaps let's use the the closest available option the Nifty large midcap 250 index we recently did a video on the Nifty large midcap 250 index it's a promy index that allocates 50% each to large and midcaps so do watch that video as well after this one I've included the link in the description okay so four out of seven indices beat their Benchmark these are Nifty Alpha 50 nifty Alpha low volatility 30 nifty 50 value 20 and Nifty 100 low volatility 30 three Factor indices fail to beat their parents Nifty 100 quality 30 Nifty 100 equal weight and nifty 50 equal weight but returns alone are just half the picture let's assess the volatility of these returns as well to do so we will measure the standard deviation of these average 5-year rolling Returns the higher the standard deviation the more the volatility just one factor index Nifty 100 low volatility 30 does better than its parent the Nifty 100 low volatility 30 also had a better return profile than its parent so both in terms of return and volatility it is the better option but to get more accurate picture let's assess the risk adjusted performance of these Factor indices against their Benchmark and parents and to do so let's divide the average five-year rolling returns by the volatility or standard deviation of these rolling returns now risk adjusted performance helps us understand if the returns are commensurate with the risk of the volatility involved the factor indices that fail to make their Mark are the Nifty 100 quality 30 Nifty 100 equal weight and nifty 50 equal weight they have lower returns but higher volatility as their risk adjusted performance is poor now if You observe the gap between the risk adjusted performance of these indices and that of their appearance that's quite wide as well ranging from 11% to 35% of the remaining four indices the low volatility ones do the best job particularly the Nifty 100 low volatility 100 index its risk adjusted performance is 9 19% better than its parents the Nifty Alpha 50 and nifty 50 value 20 also do a decent job while they lag behind their parents in terms of the risk adjusted performance the Gap isn't too wide it's almost nail for the Nifty Alpha 50 index so by taking slightly higher risk one can profit from higher returns in the case of both these indices now if we rank them in terms of their risk adjusted performance versus their parents the order would be Nifty 100 low volatility 30 niy Alpha low volatility 30 Nifty Alpha 50 and nifty 50 value 20 all right now let's talk about these four indices so you can pick the most appropriate one for yourself let's begin with the Nifty 100 low volatility 30 Index this index is derived from the Nifty 100 basket of stocks which are all large caps so the Nifty 100 low volatility 30 picks 30 less volatile stocks from this 100 stock its average fiveyear rolling returns and their volatility are better than the Nifty 100 group of stocks so is its risk adjusted performance so it's definitely a better option than the Nifty 100 this means if you want to take exposure to large caps going with this index can be quite rewarding and less bumpy what can be better than that next comes the Nifty Alpha low volatility 30 index it's a multiactor index as it combines two factors Alpha and low volatility it gives 50% weightage to each of those factors now Alpha stands for outperformance over the market or a benchmark so this index seeks to pick stocks that are doing well and are less volatile too this index picks stocks from the Nifty 100 and the nifty midcap 50 indices so it has a midcap tint as well in terms of returns this index is more rewarding than the Nifty large midcap 250 index but it's more volatile too now in Risk adjusted terms it does compensate well for the extra volatility one may have to tolerate so if you if you would like to have a large and midcap exposure within a single fund this index could be a good option for you however do know that unlike the nfty large midcap 250 index it doesn't have a defined exposure to large and midcaps so it's likely that this index will be large cap tilted as it was in December 22 and December 2023 next comes the Nifty Alpha 50 Index this index picks 50 stocks from the top 300 Stocks by market capitalization so its investment universe is quite large this index is also based on Alpha or outperformance it has quite a wide outperformance over the Nifty large midcap 250 index the volatility is much higher as well but it does compensate well for the risk taken as seen in its risk registed returns so this index is meant for those who would like to take exposure to both large and midcaps within one index and are also willing to take higher risk for the higher returns in other words this one is for more venturesome investors now as as of December 2023 this index had 43.4 5% allocation to Mid caps 28.8% allocation to small caps and 27.1 n% allocation to large caps now this High allocation to Mid and small caps is a primary reason for its massive outperformance but do know that it need not always have high allocation to Mid and small caps if it finds Alpha in large caps large caps would command a higher share in it so it can even act as an alternative to flexi Cap Fund finally comes the nifty50 value 20 index it picks 20 value stocks from the nifty50 index now to assess value it uses metrics like the price to earnings ratio The Price to Book ratio dividend yield and return on Capital employed now you can Google these terms to know more about them if needed but if you don't want to get into its technicalities that's fine all you need to know is that it is a value based index it has delivered better average returns than the nifty50 but is also more volatile however it compensates well for the extra risk taken as in its risk adjusted performance its significance lies in the fact that it is based on a clear definition of value unlike active value and Contra funds active value and Contra funds Define value both in a subjective and objective manner this often results in their Holdings looking like those of vanilla flexi CA funds that's not the case with this index you can be rest assured that you're getting a value exposure throughout it at all times as per the index methodology so if you're interested in a value fund don't ignore this one last but not the least on your screen you can find the list of all the funds based on these four indices you can invest in them on the etman app without paying any commission and that's what we had for you today hope you found it useful and if you did don't forget to share it with your friends and family and I'll be back soon with another video till then take care mutual fund Investments are subject to Market risks read all scheme related documents carefully

Channel: ET Money

Views: 32,763

Keywords: Best factor indices, index funds, factor investing, factor investing explained, Hunting for the best factors, factor indices, Risk-adjusted performance, Factor indices vs benchmarks and parents, Nifty Alpha 50, Nifty Alpha Low Volatility 30, Nifty50 Value 20, Which factor index you should choose, Nifty100 Low Volatility 30 index, factor funds, best factor funds, smart beta

Id: 39_19IrgPX4

Length: 12min 57sec (777 seconds)

Published: Sat Feb 10 2024