NSE has published nearly 100 equity indices. After eliminating the niche indexes and the ones with significant overlap, we are left with over 50. This post compares the performance of those 50+ indices.
Long-term laggards have shone in the short term
The Nifty has been more or less flat over the last year. Did you know that you’d be sitting with a 1-year return of 50+% if you had invested in the Nifty India Defence Index – a thematic 12-stock index of companies largely made up of PSUs in the defence manufacturing space?
A little less surprisingly, your next best bet would’ve been the Nifty PSU Bank Index, up nearly 40% in the last year. That is 3x what the Nifty Private Bank Index has done over the same duration.
Three other sectoral indices, Nifty CPSE, Auto, and FMCG, advanced more than 20% when most stocks struggled.
We analysed (almost) all Nifty Equity Indices since their inception, that’s 53 indices across Market Cap, Sector, Thematic and Factor-based.
Each index has an index inception date. The Nifty Total Returns Index started on June 30th 1999,, but surprisingly, it is not the oldest NSE index, based on data available on their site. The Nifty 500 and Nifty MNC have start dates four years earlier than the Nifty. The newest index is the India Defence Index, with a start date of 02-Apr-2018 and the top performer over the last year.
Which are the top (bottom) performing indices since inception?
The worst performer, by a distance, is the Nifty Realty index. Down 60% from its starting value and 93% from the peak it hit in Dec 2007.
But if you looked at cumulative returns over the last ten years, Nifty Media has done the worst, losing nearly half its value over the previous five years. PSU Banks had a stellar last year, but over ten years, they are the 2nd worst NSE index on the list.
By a distance, the best 10-year returning index is Midcap 150 Momentum 50, up 7x compared to 2.3x for the Nifty.
6 of the top 10 on 10-year returns are factor indices; NSE calls them Strategy indices. Smallcap 250 Quality 50, Nifty 200 Alpha 30, Alpha 50, Nifty 200 Momentum 30 and Midcap 150 Quality 50
2 are sectoral: IT and Consumer Durables, and 2 are traditional market cap indices: Microcap 250 and Midcap Select
But is cumulative return a robust metric to compare on? Refer to the Nifty Realty chart; it fell from a high a year after it launched and hasn’t come close to recovering. Most investors, therefore, would have entered at much lower prices.
The table below compares the indices on five parameters:
- CAGR: Annualised return if you invested on the date of inception, never invested again, and held until now
- SIP XIRR: Annualised return if you invested an equal value on the first trading day of every month since inception
- Volatility: Standard deviation of daily returns. Lower is better.
- Sharpe: How much return above the risk-free rate has the investment generated normalised for its volatility? The higher the value, the better it has done relatively.
- Maximum Drawdown: Biggest fall from lifetime high
The Nifty and Nifty 500 rows are shaded for easy identification. The columns are sortable.
CAGR and SIP XIRR
CAGR is not necessarily worse or better as a performance metric. SIP XIRR helps get more context when considered alongside CAGR.
The chart above shows the CAGR from investing in the NIFTY on any day within a five-month window, from January 1st 2020 to May 30th, 2020. If you invested in the Nifty on January 31st 2020, your 3-year CAGR as of Mar 2023 would be 14.1%, not too far off the long-term return. A month later, the CAGR would’ve been 17%, which is 20% higher. And investing on March 23rd would deliver a whopping 33.8% annually until Mar 2023.
Early 2020 is an extreme example of the impact of timing on CAGR, but it highlights the drawback of using one date as the entry point into an investment.
Unless you inherit a windfall amount and invest a large sum at one time, CAGR is unlikely to represent most investors’ return, especially over long periods. Hence we calculated the SIP XIRR, which is the annualised return from investing an equal amount every month since the investment’s inception. This, in effect, smooths out the impact of adding money at a market high or low.
If the SIP XIRR metric significantly differs from CAGR, then timing might have played a role in the CAGR number, for better or worse. For instance, SIP XIRR is considerably higher than CAGR for the Nifty India Defence index.
Two reasons, one, this index only started in April 2018, i.e. has a short history. The other reason is how it changed behaviour dramatically nearly halfway through its short life, especially after the Covid fall.
In contrast, note how the SIP XIRR and CAGR of the Nifty are almost the same.
Eliminating market-timing luck
The SIP XIRR / CAGR comparison offers a clue to how an investment has behaved. But it doesn’t eliminate sheer market timing luck when comparing different investments.
Here’s why: A portfolio commencing in Dec 2008 has better metrics than one starting in Dec 2007. Is that due to superior skill or not being around during the Great Financial Crisis?
What if we normalised start dates for the NSE indices? We eliminated indices that started after 1-Apr-2005 and set the start date for all others as 1-Apr-2005. That’s nearly 18 years across which to compare the remaining 43 indices.
This is how the surfeit of NSE Indices stack up on performance.
Long Term: Factor and select Sectoral indices lead, Thematics trail
- In the top 10 by CAGR, 6 are Factor indices in the top 10 top-performers by CAGR: M150 Momentum 50, N200 Momentum 30, Smallcap 250 Quality 50, M150 Quality 50, N200 Quality 30 and Nifty Alpha 50
- The remaining 4 are Sectoral indices: FMCG, Consumer Durables, Private Banks and Financial Services ex-Banks
- The ranking changes slightly when ranked by SIP XIRR
- Note how the Nifty is in the middle of the pack regarding annualised returns. However, also note how much even the top-performing indices have fallen (Max DD) when compared to the Nifty.
- Any way you look at it, the broad market cap indices rank lower than factor and sectoral indices. The thematic indices rank fare worse, showing up at the bottom of the list, indicating the futility of investing based on emerging narratives. The worst performer of the 43 indices is the High Beta factor.
But Index Performance is not Investment Performance
Before concluding that replicating stocks held by the top-ranked indices is the way to go for the long-term, a quick note of caution against equating index performance with investment performance from investing in those indices:
- Many NSE indices were only published a few years ago, even though their start dates were well back in the past. So you couldn’t have invested in their constituents except, in hindsight.
- Some are not investable even if you know their constituents. A lot of these indices do not have real-world index funds or index ETFs tracking them. So the only way one could invest is to manually buy and rebalance the stocks at every index rebalance.
- The ones that are investable have their own challenges. Case in point, the Nifty Alpha 50 is one of the best-performing indices in the mix. However, as investors in the Kotak Alpha 50 ETF found out, just because there’s an index doesn’t mean you can invest.
- Finally, it’s hard to discount the impact of hindsight. Index providers stand to see incremental revenue from publishing more indices, especially if they can show “superior” performance because more asset managers launch products tracking those indices. Little surprise that NSE has over 50 indices. On the other hand, there isn’t as much scrutiny of the process index providers follow to validate the underlying investment philosophy or the historical constituents to ensure they weren’t just picked with the benefit of hindsight and a catchy label slapped on later. Not unlike this image:
Image Source: bayesianspectacles.org
What indices will outperform over the next year? Will Defence companies and PSU Banks continue their stellar run? Will IT, Consumer Durables, and the Momentum factor continue to lag like they have for the last year? What we can be sure about is that irrespective of how the overall market does, there will be outlier leaders and laggards on the list above.
You might also like:
Which is the best Nifty Factor Index? – CM
Nifty 50 Monthly Returns since inception – CM
Next 50 Monthly Returns since inception – CM
Nifty Strategy Indices Performance – CM
The Texas sharpshooter fallacy – bayesianspectacles.org
This post is for informational purposes only and is not investment advice. Have questions or comments? Let us know! @CalmInvestor and @Capitalmind_in
