Last Updated on October 9, 2023 at 4:10 pm
Edelweiss US Technology Equity Fund of Fund is the new open-ended fund of fund from Edelweiss AMC that will invest in JPMorgan Funds – US Technology Fund. Here is what interested investors need to know before committing money.
First the basics. A fund of fund is a mutual fund that invests in another mutual fund(s) (aka “underlying fund(s)”). So it will always be taxed like a non-equity fund. Aside from the volatility of the underlying funds, there are two other factors that investors need to be aware of.
(1) Currency risk. The USD-INR rate volatility will determine returns. While over the long term this return is stable and positive, it can fluctuate wildly in the short-term. An illustration of this exchange rate factor can be seen here: Motilal Oswal Nasdaq 100 Fund of Fund: Do not invest!
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(2) Higher expense ratio. The investor will bear expenses of the fund of fund and the underlying fund(s). To minimise this, the underlying fund is usually an ETF. In the present case, JPMorgan Funds – US Technology Fund is not an ETF or an index fund. Its current expense ratio is 0.72%
Motivation and objective of Edelweiss US Technology Equity Fund of Fund: Invest in sound US-based technology and technology-related stocks that are in the early stages of adoption with a potential to disrupt existing businesses. Source: NFO leaflet (the featured image above is also sourced from this leaflet under fair use norms).
What is the investment objective of JPMorgan Funds – US Technology Fund? According to JPMorgan, its objective is to “provide long-term capital growth by investing primarily in technology, media and telecommunications related US companies”. It follows a fundamental, bottom-up stock selection process to “try and identify the best investment ideas in technology-driven sectors”.
Although the fund has been in existence since Dec 1997, Russell 1000 Equal Weight (EW) Technology Index has been benchmark only since Oct 2017. It is important for investors to appreciate what an equal-weighted benchmark is and how the Russel EW index is different.
Indices like the S & P 500, Nasdaq 1000, Sensex or Nifty are market-capitalization-weighted indices. Higher the market cap of a stock, higher the exposure in the index. An equal-weighted index is one in which all the stocks in the eligible universe have similar weights.
Russel 1000 index is a market-cap-weighted index of the 1000 largest US companies. Technology and technology-related stocks of the Russel 1000 are eligible for inclusion in the Russell 1000 Equal Weight (EW) Technology Index.
Although an equal-weighted index offers better diversification and does not allow a few stocks to dominate the index, it is also quite risky. Take for example the Russel 1000 Equal Weight Index. Index house FTSE Russel adopts a two-step equal-weighting approach to create the Russel 1000 Equal Weight Index
Nine sectors from the Russel 1000 index, Materials & Processing, Utilities, Consumer Staples, Energy, Producer Durables, Health Care, Consumer Discretionary, Financial Services and Technology are first equally weighted and then the stocks within each sector are equal-weighted. Reference: Russell 1000 Equal Weight Index:
Equal weighting refined
The trouble with these equal-weighted indices is the higher downside risk. When the going is good, they may outperform a market-cap based index but when things go south, they fall harder. See for example this screenshot from Invesco Russell 1000 Equal Weight ETF fact sheet.
Now, the Russell 1000 Equal Weight (EW) Technology Index is a sectorial equal-weighted index. This is a two-fold risk. Even market-cap-weighted sectorial funds are riskier than the market (defined as market-cap-weighted diversified index). This is an equal-weighted sectorial index. Meaning in the case of a downturn, the fall could be significantly more.
This is the market cap history of the underlying fund. It is a multi-cap sectoral fund!
This is a screenshot of the fund’s Jan 2020 factsheet.
Summary: Investors wanting “some exposure” to US-based technology stocks are better off with a fund like ICICI Prudential US Bluechip Equity Fund. It is reasonable to expect the Edelweiss US Technology Equity Fund of Fund to be significantly riskier during market downturns than the S&P 500. It is best avoided.