Stock market indices are a popular yardstick for the performance of any stock market around the world. Key benchmark indices not only provide vital information about the quality, depth and strength of the stocks forming part of a particular index, but also give an insight into the strength of any economy in general. That is why a particular stock market index is developed based on the criteria which considers factors such as representation, liquidity, size of the components so as to ensure broad-based and accurate representation of the overall stock market dynamics.
For the Pakistan Stock Exchange (PSX), KSE-100 has been such index for both local and foreign investors alike. It represents a free-float market capitalization-based selection of the top companies listed on PSX.
Theme based indices are also common in well-developed stock exchanges around the world. ETFs in particular, require benchmark indices that are practical and easy to replicate in terms of liquidity and size of the constituents. In Pakistan, ETFs are fairly new with the first two ETFs being launched just about a year and a half ago. NIT Pakistan Gateway ETF was among the first-ever ETFs launched in Pakistan.
The ETF aims to track the performance of NIT Pakistan Gateway Index (NITPGI). NITPGI consists of the highest market capitalization stocks forming part of the KSE-100 index such that it covers at least 50% of the total market capitalization of the KSE-100 index at all times. As such it covers the largest and most widely traded stocks of PSX, and also does not include any obligatory inclusion of stocks based on sector representation.
Usually, the largest 14-15 stocks by free-float market capitalization form 50% of the market capitalization of the KSE-100 index and thus form the constituent universe of the NITPGI.
The main idea behind formation of this index was that it represents the essence or ‘gateway’ to the Pakistan stock market in particular and is a decent representation of the Pakistan economy in general. In a nutshell, an ETF based on NITPGI will give a decent exposure to all major stocks as well as sectors listed on the PSX and will also represent a cross-section of Pakistan’s economy.
All of the above sounds good in theory and a practical idea for the launch of an ETF based on an attractive theme. However, the hard question is, how does this theme perform on the ground? Does it really do what it promised to do in theory that is, capture the essence of the market and providing a wide representation for the overall economic situation of the country? Well, about one-and-a-half years since launch, a picture has emerged that is summarized below.
With 50% market capitalization of KSE-100 index, NITPGI has captured more than 2/3rd of the performance of the KSE-100 index.
NITPGI fared better as compared with a more concentrated KSE-30 index which consists of the top 30 market capitalization based stocks listed on PSX.
Current FYTD (July 01, 2021 onwards) performance indicates that theme-based indices forming benchmarks for ETFs have performed better in a bearish market. NITPGI has been the top performer during this period with a decline which is almost one-fourth of the decline in KSE-100 index.
Note that NITPGI generally consists of 14-15 stocks hence this performance against benchmarks such as KSE-100 (consisting of 100 stocks) and KSE-30 (consisting of 30 stocks) is remarkable in a volatile market.
The implication of the above data is that for investors looking for a benchmark-based investment avenue, ETFs provide a very attractive option as they deliver a decent return for investors. Furthermore, for investors who cannot actively manage investments, these theme-based ETFs provide an attractive and low-cost investment option.
(The writer has more than 18 years of rich and dynamic professional experience primarily as an investment manager both in Pakistan and overseas. The views expressed in this article are not necessarily those of the newspaper)
Copyright Business Recorder, 2021
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