Traditional indices like Nifty-50 are market-cap weighted, which means the higher the market capitalisation of the company, the higher its weightage will be in the index. Stocks like TCS and Infosys that have huge market caps get a proportionately higher weightage in the index. This means that when you invest in the Nifty, a lot more money will go into these stocks as compared to the rest of the stocks in the index. Moreover, a change in the stock price of TCS or Infosys will impact the overall index more compared to the same amount of change in other smaller market cap stocks.
While the origin of Smart Beta can be traced to the early 1990s, this style of investing has become really popular across the globe in the last 5-10 years due to its low-cost & better results. Smart Beta is seen as a midway between active & passive investing since it employs both – it’s active in construction since it deviates from the traditional index, yet passive as follows a predefined rules-based methodology and doesn’t rely on any subjective calls from individuals (like a fund manager).
Smart Beta strategies aim to outperform the traditional index by redesigning it based on different rules, usually by weighting the stocks using factors other than the market-cap. There are many such factors like Value, Momentum, Size, etc. that the investor can focus-on when determining which Smart Beta strategy to select. In the case of the Dividend Smart Beta smallcase, that primary factor is dividend – companies are selected and then allocated a weightage that’s primarily based on their dividend yield.
Firstly, only firms that have consistently increased their dividends over the last 5 years are selected from the universe of the largest 150 companies on the NSE. This ensures that only liquid stocks that have an established track-record of increasing their dividends and sending strong positive signals to the market are selected. The final list of stocks are selected on the basis of high dividend yield, and the weightage of these stocks is decided using a mathematical model that minimizes the volatility of the overall portfolio.
The Dividend Smart Beta smallcase has been backtested over 10 years and the strategy has been adapted for the Indian markets. The current portfolio invests in a mix of leading & growing companies that are across sectors like HDFC, Asian Paints, Hindustan Unilever, Godrej Consumer Products, and Motherson Sumi. Moreover, this portfolio is rebalanced every year to ensure that only firms that meet the above liquidity & dividend criteria remain in the smallcase. Note that the main reason for the annual rebalancing is because dividend related information is only available once-a-year for most Indian-listed companies.
This smallcase has a defined objective of beating the Nifty index, and is primarily composed of liquid large-cap stocks. If you’re looking to get such exposure or are planning to invest for dividends, then you should definitely consider this smallcase.