Bharat 22 ETF: Investor rush for high dividend yield stocks lifts Bharat 22 ETF returns

As investors chase dividend-paying stocks on Dalal Street in an uncertain market, it has spelt good times for Bharat 22 ETF, the exchange-traded fund that made news this past fortnight with record subscription to its third tranche offering.

In a volatile market with mixed outlook, companies with a strong track records of doling out dividends are finding favour with investors.

Many of the cash-rich PSU stocks that are part of Bharat 22 are high dividend yield companies and are trading at cheaper valuations compared with the broader market. These stocks have been performing well in the past few days, aiding the performance of the ETF.

This has come as an icing on the cake for the investors, who subscribed to the additional offering of Bharat-22 ETF during the single-day window for the third tranche. While these subscribers were offered a 5 per cent discount on the units, the scheme also delivered around 9 per cent return this past fortnight against a 0.14 per cent rise in Nifty50.

On an absolute basis, the ETF delivered 3.87 per cent return compared with a 0.58 per cent gain in Nifty during this period.

Analysts on Dalal Street estimate Nifty50 companies to deliver an aggregate dividend yield of 2.2 per cent for financial year 2020. Within the Nifty pack, the constituents are projected to deliver an aggregate dividend yield of 2.2 per cent for FY20. The highest yield is expected from the energy sector at 5.3 per cent and lowest from the pharma basket at 0.75 per cent. Analysts expect six out of 50 Nifty stocks to have a dividend yield in excess of 5 per cent.

The PSUs that are part of Bharat 22 ETF include ONGC, IOC, SBI, BPCL, Coal India, Nalco, Bharat Electronics, Engineers India, NBCC, NTPC, NHPC, SJVNL, GAIL, PGCIL and NLC India. Besides, there are three public sector banks — SBI, Indian Bank and Bank of Baroda — and private sector firms Axis Bank, ITC and L&T, where the government holds small stakes through Specified Undertaking of Unit Trust of India or SUUTI.

Most of these are cash-rich companies with history of declaring dividends generously. Analysts expect Coal India, ONGC and IOC to deliver best dividend yields in the Nifty50 pack in excess of 5 per cent in FY20. In the midcap basket, Nalco is projected to deliver over 5 per cent dividend yield.

The Bharat 22 ETF, which is managed by ICICI Prudential AMC, tracks the BHARAT 22 Index.

“BHARAT 22 Index is available at a cheap valuation compared with the broad market indices. All the companies forming part of BHARAT 22 are high dividend yielding companies. The index constituents of BHARAT 22 have performed well in last few days, which has added to the performance of the scheme,” said Chintan Haria, Head of Product Development and Strategy at ICICI Prudential AMC.

The government has been using the BHARAT 22 ETF for disinvesting its holdings in profitable PSUs. The government has so far raised Rs 26,400 crore through the Bharat-22 ETF – Rs 14,500 crore was raised in November 2017, another Rs 8,400 crore was raised in June 2018 and Rs 3,500 crore this February.

BHARAT 22 ETF is exposed to six sectors with a 15 per cent cap on single stock and 20 per cent on a single sector.

ETFs are considered better investment options within the mutual fund basket because of the cost advantage they offer. Being passive funds, they charge miniscule fund management fee.

Bharat 22 ETF has a 93 per cent exposure to largecaps, which makes it a safer bet in an uncertain market. Haria says improving domestic macros are a major positive for the ETF, while favourable government policies, too, are expected to work to the advantage of some of the PSUs, eventually helping the ETF.