Likely rally in PSUs makes Bharat 22 ETF a good short-term bet

Investors who want to make a quick buck could subscribe to the fourth installment of Bharat 22 Exchange Traded Fund.

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Investors who want to make a quick buck could subscribe to the fourth installment of Bharat 22 Exchange Traded Fund, which will hold shares of a mix of government companies, banks and a handful of private firms. The Bharat 22 ETF issue, which will help the government raise up to Rs 8,000 crore, will be launched on October 3 for anchor investors. Other institutional and retail investors could participate the next day.

The 3 per cent discount to the issue price has been the biggest selling point for Bharat 22 ETF. But, this time the effective discount makes the product less attractive.

“The discount of 3 per cent narrows further after removing the stocks that the government is not offering or partially offering in the ETF. The effective discount would come down to 2.4 per cent and it would further reduce to 2 per cent if ITC shares are not offered by the government,” says Yogesh Radke, head of alternative and quantitative research at Edelweiss Securities. ICICI Prudential Mutual Fund is managing the issue.

Shares of companies in the Bharat 22 ETF that are not given by the government will have to be bought by the fund manager at the market rate which will result in the discount shrinking.

“We don’t see much of an opportunity for retail investors after taking into account transaction and brokerage costs, which will reduce the discount to 1.5 per cent,” said Amit Gupta, derivatives head of retail brokerage

Likely rally in PSUs makes Bharat 22 ETF a good bet
The issue will have a base offer size of Rs 2,000 crore with an option to retain additional subscription of another Rs 6,000 crore.

Bharat 22 has a low expense ratio with a concentrated portfolio with the top 5 stocks accounting for 56 per cent and the top three sectors constituting 78 per cent of its portfolio.

Some of the stocks of state-owned entities and banks in Bharat 22 ETF include ONGC, IOC, BPCL, Bharat Electronics, Engineers India, SBI, Indian Bank and Bank of Baroda. Axis Bank, ITC and L&T are the private companies.

Analysts say expectations of a short-term rally in PSU stocks because of the beaten-down valuations and high dividend yields could lead to higher investor appetite for Bharat 22 this time.

“Short-term investors could use the ETF as a tactical play, given the beaten down valuations of several PSU shares,” says Tarun Biran, founder, TBNG Capital Advisors.

Long-term investors could skip the issue as the government is not an efficient allocator of capital, said Biran. Also, the product has been an underperformer in recent times.

The first Bharat 22 ETF issue, which was launched in November 2017, is down 3.67 per cent.

Over the last one year, the Bharat 22 ETF has lost 1.66 per cent, while the broad-based S&P BSE Sensex has gained 6.22 per cent.
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