Navigating market volatility with Nifty Alpha Low Volume ETF

As equity markets around the world unravel against a backdrop of escalating geopolitical tensions and interest rate hikes, equity investors are fazed by heightened volatility and many of the investor’s portfolios may have slipped into the red. This can be an unnerving experience for many, especially those who are new to investing. One of the first moves by budding investors during phases of uncertainty is to pause their equity investment as a means to protect the portfolio from further downside. However, this does not help when looked at from a long-term perspective.

The key point of concern here is volatility. So, investors who are averse to market volatility can consider products where low volatility is one of the primary criteria while putting together a portfolio. Also, investors seek to outperform high alpha generating names as well in the portfolio. This is where offerings based on two factors – Alpha and Low Volatility – come into the picture.

The Nifty Alpha Low-Volatility Index

Over the past couple of years, fund houses have been offering a variety of investment products that are based on factors such as alpha and low volatility. One such offering which combines both these factors is the Nifty Alpha Low Volatility index. The index is designed to reflect the performance of stocks selected basis the combination of alpha and low volatility.

The Nifty Alpha Low-Volatility 30 index is a collection of 30 companies that have outperformed the broader market over the past 12 months while being relatively less volatile. Chosen from a basket of 150 stocks (Nifty 100 Index + Nifty Midcap 50 Index), the index is rebalanced once every six months. The weightage of each stock in the portfolio is capped at 5%. As of June 2022, the index is diversified across over 10 sectors with FMCG, IT, Healthcare, Power and Chemicals constituting the top five sectors. The sector-wise distribution and weights assigned vary with time as the index adjusts to changing market conditions, giving preference to outperforming stocks with relatively low volatility.

In terms of returns generated, in the calendar year 2021, the Nifty Alpha Low Volatility 30 TRI delivered a 31% return as compared to 25.6% of Nifty 50 TRI and 26.5% of Nifty 100 TRI. Similarly, over the past decade, Nifty Alpha Low Volatility 30 TRI has outperformed the broad market indices 7 out of 10 times until 2021.

Ways to Invest
Since investors cannot invest in such indices directly unless they individually purchase each constituent stock in the proportion of their weightages, mutual fund houses have introduced Exchange Traded Fund (ETFs) that replicate the Nifty Alpha Low-Volatility 30 Index. Investors with a demat account can opt for ETF and those without a demat can opt for the Fund of Fund (FoF). The ETF can be purchased or sold on the stock exchange at any time of the trading hours. The cost associated with ETF offerings tends to be lower since they are passively managed. So, if you are an investor looking to invest in names that may help generate alpha with less volatility, then you may consider investing in Alpha Low Vol 30 index-based ETF or FoF.


(The author, Chintan Haria, is Head – Product Development & Strategy, ICICI Prudential AMC)