Last Updated on April 18, 2020 at 10:48 am
We compare the 10-year SIP returns of twenty market cap-weighted and factor-weighted indices (1st April 2010 to 16th April 2020) to find out how factors like low-volatility, alpha, momentum, quality, value etc fared during this market crash.
A Nifty strategic index or a smart beta index is one in which stocks are chosen by one or more methods (factors) of stock selection instead of simply picking stocks by market capitalization. So by investing in a smart beta index, we combine both active and passive methods of investing.
It is still a matter of active debate whether factor-based investing is capable of beating a simple market-cap-weighted index. Some experts believe Index curators pick and choose specific factors based on past performance without rhyme or reason: Data Mining in Index Construction: Why Investors need to be cautious.
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Also, many of these factor-based indices do not have much of an actively traded history and is based on simulation. Readers are advised to tread cautiously while processing the returns listed below. Past performance has no bearing on future performance even if the index curator does not change the stock selection process mid-way (they could!).
The only sure-shot factor is low volatility which by definition/construction lower volatility than the Nifty 100. This may or may not lead to higher returns than the base index.
With such caveats in place, this is an overview of the type of factor-indices available in India. We have a few ETFs based on this and actively managed factor-based quant funds, but no index fund so far.
These are two lectures on factor-investing presented before the TamilNadu Investors Association in the summers of 2018 and 2019.
These are some previously published resources on factor-investing.
- Nifty Strategy Indices as Mutual Fund Benchmarks
- NIFTY100 Alpha 30 Index Review: How good a “factor” is alpha?
- How new stock investors can quickly start investing using NIFTY Multi-Factor Indices
- Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50?
- Momentum Stock Investing in India: Does it work?
- Low volatility stock investing: Does it work? Higher returns at lower risk?
- Nifty Low Volatility 50: A Benchmark Index to watch out for
Readers may also be aware that a monthly low volatility and momentum stock screener is published. This is the latest edition: Five Stocks with momentum & low volatility (Stock Screener April 2020)
Factors used in index construction
These are the key selection criterion. Additional constraints such as stock universe (NIfty 100, Nifty 300 etc) trading frequency would apply. Readers can study the methodology document and factsheet for individual factor indices maintained by the NSE or BSE
- Alpha is a measure of risk-adjusted outperformance with respect to NIfty 50 and the MIBOR 3-month bond rate representing the risk-free return. Higher the alpha, the higher the weight in the index. In essence, higher the excess return + lower the volatility the better. The last one year is considered for calculation.
- Low-Volatility: stocks with lowest fluctuations in daily returns for the past year are part of this index
- Quality: This factor uses three metrics: Return on equity (ROE), Debt equity ratio (D/E) and Average change in Profit After Tax (PAT) in the previous 3 financial years. Only those companies with positive PAT in the last 3Y are eligible. Then it creates a quality score.
- Quality score = 40% ROE – 40%D/E+20%(PAT increase)
- Value: This is based on high ROCE (Return on Capital Employed), low PE, low PB and high Dividend yield (DY) in the last financial year with positive PAT in the same period.
- Value score= -30%PE -20%PB +40%ROCE +10%Div. Yield
- Momentum: Includes stocks that have shown the higher price increase in the last 12 months with low volatility (aka quality momentum, see my talk). Weighting is based on quality momentum score
- Growth Sectors: Sectors that exhibit PE and PB on average greater than the Nifty are first selected. Then, the top 50% market cap of all such stocks is shortlisted and ranked in terms of EPS growth. Top 15 in the list forms the index
- Dividend Opportunities: Chooses stocks with net profit and high dividend yield.
These factors are combined to created multi-factor indices such as:
- NIFTY Alpha Low-Volatility 30 = 50% alpha + 50% low volatility
- NIFTY Quality Low-Volatility 30 = 50% quality + 50% low volatility
- NIFTY Alpha Quality Low-Volatility 30 = 1/3 Alpha + 1/3 Quality + 1/3 Low Vol
- NIFTY Alpha Quality Value Low-Volatility 30 = 25% Alpha + 25% Quality + 25% Value + 25%Low Volatility
Caution: These indices could fall more during market turmoil than standard market-cap-weighted indices. Please do your own research before considering these indices or their stocks.
List of 10-year SIP returns for select Indices
| Scheme Name | XIRR(%) |
| NIFTY Alpha Low-Volatility 30 – TRI | 14.1% |
| S&P BSE Momentum Index | 13.6% |
| NIFTY Alpha Quality Low-Volatility 30 – TRI | 12.3% |
| NIFTY ALPHA 50 | 12.0% |
| NIFTY Alpha Quality Value Low-Volatility 30 – TRI | 11.0% |
| NIFTY LOW VOLATILITY 50 | 10.9% |
| NIFTY Midcap150 Quality 50 | 10.7% |
| Nifty 200 Quality 30 Index – TRI | 10.6% |
| NIFTY Quality Low-Volatility 30 – TRI | 10.3% |
| NIFTY 100 Low Volatility 30 Index – TRI | 9.6% |
| NIFTY NEXT 50 – TRI | 8.7% |
| NIFTY MIDCAP 150 | 7.8% |
| Nifty LargeMidcap 250 Index – TRI | 7.0% |
| NIFTY 100 Equal Weight Index – TRI | 6.6% |
| NIFTY50 Value 20 | 6.5% |
| NIFTY GROWSECT 15 | 6.1% |
| NIFTY 100 – TRI | 6.0% |
| NIFTY 50 – TRI | 5.5% |
| NIFTY DIV OPPS 50 | 4.8% |
| NIFTY 50 Equal Weight Index – TRI | 2.4% |
These five indices delivered a min 2X return over NIfty 50.
- NIFTY Alpha Low-Volatility 30 – TRI (this is the index in the image above)
- S&P BSE Momentum Index
- NIFTY Alpha Quality Low-Volatility 30 – TRI
- NIFTY ALPHA 50
- NIFTY Alpha Quality Value Low-Volatility 30 – TRI
Notice Alpha and low volatility feature prominently. Alpha has its own relative volatility measure. Stocks with low absolute and relative volatility wrt the Nifty have done quite well.
Also, notice that NIFTY Midcap150 Quality 50 > NIFTY NEXT 50 – TRI >NIFTY MIDCAP 150.
NIFTY 50 Equal Weight Index – TRI has only half the return of NIFTY 50 – TRI while NIFTY 100 Equal Weight Index – TRI has outperformed Nifty 100 TRI again pointing to the NIfty being drive in the past couple of years by just a few stocks.
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