Motilal Oswal MOSt Shares M50 ETF

Update: Motilal Oswal left a comment on this post pointing to more recent documentation about the ETF, which contains more information about the underlying index. Here is the updated post with that information.

By now at least a few of you must have heard about this new ETF that is based on some sort of a fundamentally enhanced Index based on the S&P CNX Nifty Index.

I read about it yesterday, and then went through the prospectus to figure out what a “fundamentally enhanced index” means. But I didn’t find any answer there, and feel that the fund has done a very bad job of explaining how its index will behave.

In fact just reading through their description, it is not possible to figure out how the index will be constituted, how has it behaved in the past, and how exactly is it fundamentally enhanced?

Here is what I did find about the index:

K. ABOUT MOSt 50 Index
1. Objective
MOSt 50 Index is a fundamentally enhanced index based on S&P CNX Nifty Index
(Nifty).
MOSt 50 Index is designed such that it has the following characteristics:
1.1. Weights are assigned to all 50 constituents of Nifty.
1.2. Weights assigned to constituents are based on third party data and explicitly
defined rules.
1.3. Weights assigned to constituents are dependent on their fundamental performance
and their prices with higher weights being assigned to constituents which have
demonstrated superior financial performance and have reasonable valuation.
1.4. While designing MOSt 50 Index, care has been taken by AMC to ensure that:

1.4.1. Index beta (β), a measure of the correlation of the index returns with
market returns, is close to 1. Market Returns are defined as returns from an
investment made in Nifty.
1.4.2. Index Jensen’s alpha (α), a measure of returns in excess of market returns,
should be reasonably high.
1.4.3. Index’s Sharpe ratio, a measure of returns provided for the risk taken,
should be high.
1.4.4. Index turnover should be reasonable.

Reading through the description tells you that all 50 Nifty companies will be there in the index, but not in the same weights as they are present in the Nifty. There are some explicitly defined rules that will decide what the weights are, but those rules are not present in the prospectus.

The fund is expected to incur 1.50% of its assets as expenses, and if you compare it to Nifty Index Mutual Funds and ETFs, you can get them at the same or lower expenses. In fact, the Kotak Nifty ETF has got expenses of just 0.5%.

I think SEBI should ask these guys to explain how the underlying index will work, so that people get an idea on how the constituents are selected, and how it would change with time.

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