Why you should not get tempted by Quality ETF

Edelweiss Mutual Fund’s latest fund launch, the Edelweiss ETF – Nifty Quality 30, has a unique proposition among the current exchange traded funds (ETF). It seeks to mirror the performance of the NSE Quality 30 index, a so-called ‘strategy’ index which provides a selective play on today’s most fundamentally strong companies. The index derives its 30 constituents from the top 100 stocks by market capitalisation cherry-picked on the basis of parameters like low debt-equity, high return on equity and high profit growth—all indicators of a durable business model that can provide sustained growth.

The index will rebalance the portfolio once a year based on these parameters, and will accordingly reflect in the ETF portfolio. So is this an opportunity investors should latch on to? To be sure, this set of stocks has been among the favourite picks of investors in the past few years otherwise marked by high degree of uncertainty in earnings.

The product manufacturer highlights the superior performance of the underlying index in the past to make a case for investing in it. Back-tested results apparently show that the Edelweiss ENQ30 has comfortably outperformed not only the Nifty 50 index but also most of the large–cap equity funds across the 3 and 5 year time periods (a much lower expense ratio of 0.49% would have aided the latter). But investors would do well not to get swayed by these numbers. Back-tested data should not be taken as conclusive evidence that the strategy will always work in your favour.

Besides, the period for which actual performance data is available (ie from the time of launch of the underlying index on 19 march, 2015) indicates only marginal outperformance. While the Nifty has since lost 8.9%, the Nifty Quality 30 has lost 7.7%. This outperformance also may or may be sustainable in the future. As such, although the investment argument seems compelling, investors would do well to monitor the fund’s performance in the coming years and take a call later. The fund NFO closes today.