The Motilal M50 ETF is a Bad Remix

Three years ago Motilal Oswal launched it’s asset management company (AMC) and decided to focus on exchange traded funds (ETFs) as opposed to mutual funds. An AMC is just a fancy description for a financial institution that is selling mutual funds. ETFs are similar to mutual funds but instead of buying them from a mutual fund company you buy them on an exchange such as the National Stock Exchange (NSE) hence the name exchange traded funds.

The first product out of the Motilal Oswal AMC stable was the Nifty M50 (my blog post from 3 years ago). It launched in July 2010 and was touted as taking the 50 stocks that make up the Nifty index and then “remixed according to Motilal’s predefined methodology based on fundamental performance and valuations” – their words not mine. In the marketing material for the M50 it showed how the M50 kicked the Nifty index to the curb in terms of performance.

So here we are three years later and how has the M50 done as compared to it’s main competitor the Goldman Sachs Nifty BeES? Since the M50 marketing material compared itself to the Nifty Index I add that to comparison as well.

After year 1 (July 30, 2010 to July 29, 2011)
Motilal M50 -5.90% (yes, negative 5.90%)
GS Nifty BeES +3.72%
Nifty Index +2.13%
The delta between the M50 and BeES was 9.62% (962 bps)

After year 2 (July 30, 2010 to July 30, 2012)
Motilal M50 -12.09%
GS Nifty BeES -3.51%
Nifty Index -3.13%
The delta between the M50 and BeES was 8.58% (858 bps)

After year 3 (July 30, 2010 to July 30, 2013)
Motilal M50 -5.40%
GS Nifty BeES +7.09%
Nifty Index +7.22%
The delta between the M50 and BeES was 12.49% (1249 bps)

The numbers speak for themselves, from the very beginning the M50 has underperformed as compared to the GS Nifty BeES and the Nifty Index. When it was launched it was marketed as India’s first actively managed ETF, which just means it’s a regular mutual fund that is traded on the exchanges. In the end it comes down to the fund manager and the stock selection methodology, which based on the M50 numbers has done horrible and definitely something I would not recommend investing in.

Brokers and wealth advisors hate me because my personal preference is toward index trackers such as the Nifty BeES which passively replicates the Nifty index at a lower cost. The expense ratio for the M50 is 1.25% (125 bps) whereas the Nifty BeES is 50 bps. As a comparison some Vanguard ETFs in the US have expense ratios as low as 5 bps, such as the Vanguard Total Stock Market Index Fund.

However, the news is not all gloomy for Motilal’s AMC, they do have one of the best performing ETFs on the market today – the Motilal Oswal MoST Nasdaq 100. Which as the name indicates tracks the Nasdaq index, it’s probably the best low cost instrument in India to get exposure to the US markets.

Epilogue – As I was gathering content for this blog post, I saw several articles (here and here) indicating that the fund manager Rajnish Rastogi for many of the Motilal ETFs including the Nifty M50 had recently passed away. RIP.