S&P 500 has as the name suggest 500 stocks. It makes it pretty difficult for a retail investor to create a portfolio, unless they have 10s of millions of dollars. As a result, investors have gone via ETF route to help them replicate the returns of the index. The market is quite efficient and the cost involved is also low (management fee of 4-20 basis points) compared to what is charged by mutual funds in India.
In India, if I invested the 15 Lakhs in Nifty, I could replicate the portfolio within 2.5% error (the cost of the management fees). Added advantage being that I get NIFTY total returns (benefit of dividends, stock repurchase, rights, one time offers etc.) which is not shown by fund managers when they show the fund performance against the benchmark. I am surprised why not many individuals are still going through mutual funds & not direct.
There are 100s of papers pointing to the fact that “In an efficient market, portfolio managers cannot beat the market (once compensated for the management fees)”. If you also subscribe to this theory, the chart below from the 10th July closing price might give you some tips. Please note this was constructed when market was at an all-time high. If a 10% correction happens, your money can buy you more stocks and help reduce tracking error further.
Sector | Stock Name | Weightage (%) in index | Share price | no of shares | Actual investment | Portfolio weightage |
ALUMINIUM | Hindalco Industries Ltd. | 0.77 | 3726.05 | 3 | 11,178 | 0.75 |
AUTO ANCILLARIES | Bosch Ltd. | 0.59 | 662.85 | 13 | 8,617 | 0.58 |
AUTOMOBILES – 2 AND 3 WHEELERS | Bajaj Auto Ltd. | 1.05 | 2731.9 | 6 | 16,391 | 1.10 |
Hero MotoCorp Ltd. | 1.33 | 1673 | 12 | 20,076 | 1.34 | |
AUTOMOBILES – 4 WHEELERS | Eicher Motors Ltd. | 1 | 28039.9 | 1 | 28,040 | 1.88 |
Mahindra & Mahindra Ltd. | 1.75 | 1366.5 | 19 | 25,964 | 1.74 | |
Maruti Suzuki India Ltd. | 2.67 | 7440 | 5 | 37,200 | 2.49 | |
Tata Motors Ltd DVR | 0.37 | 268.25 | 21 | 5,633 | 0.38 | |
Tata Motors Ltd. | 2.26 | 83.5 | 406 | 33,901 | 2.27 | |
BANKS | Axis Bank Ltd. | 2.45 | 510.5 | 72 | 36,756 | 2.46 |
Bank of Baroda | 0.42 | 166.5 | 38 | 6,327 | 0.42 | |
HDFC Bank Ltd. | 9.3 | 1639.95 | 85 | 139,396 | 9.32 | |
ICICI Bank Ltd. | 5.17 | 1070.4 | 72 | 77,069 | 5.15 | |
IndusInd Bank Ltd. | 2.06 | 383.6 | 81 | 31,072 | 2.08 | |
Kotak Mahindra Bank Ltd. | 3.23 | 963.35 | 50 | 48,168 | 3.22 | |
State Bank of India | 2.82 | 285.25 | 148 | 42,217 | 2.82 | |
Yes Bank Ltd. | 1.49 | 1511.2 | 15 | 22,668 | 1.52 | |
CEMENT AND CEMENT PRODUCTS | ACC Ltd. | 0.37 | 1629 | 3 | 4,887 | 0.33 |
Ambuja Cements Ltd. | 0.5 | 254.25 | 30 | 7,628 | 0.51 | |
UltraTech Cement Ltd. | 1.15 | 4145 | 4 | 16,580 | 1.11 | |
CIGARETTES | I T C Ltd. | 7.65 | 291.65 | 394 | 114,910 | 7.69 |
COMPUTERS – SOFTWARE | HCL Technologies Ltd. | 1.35 | 849.5 | 24 | 20,388 | 1.36 |
Infosys Ltd. | 5.19 | 332.9 | 234 | 77,899 | 5.21 | |
Tata Consultancy Services Ltd. | 3.49 | 447.7 | 117 | 52,381 | 3.50 | |
Tech Mahindra Ltd. | 0.66 | 383.8 | 26 | 9,979 | 0.67 | |
Wipro Ltd. | 0.91 | 268.5 | 51 | 13,694 | 0.92 | |
DIVERSIFIED | Hindustan Unilever Ltd. | 2.14 | 196 | 164 | 32,144 | 2.15 |
ENGINEERING | Larsen & Toubro Ltd. | 3.85 | 1734.5 | 33 | 57,239 | 3.83 |
FINANCE – HOUSING | Housing Development Finance Corporation Ltd. | 7.13 | 1097 | 98 | 107,506 | 7.19 |
Indiabulls Housing Finance Ltd. | 0.96 | 1560.75 | 9 | 14,047 | 0.94 | |
GAS | GAIL (India) Ltd. | 0.65 | 364.4 | 27 | 9,839 | 0.66 |
MEDIA & ENTERTAINMENT | Zee Entertainment Enterprises Ltd. | 0.75 | 504.3 | 22 | 11,095 | 0.74 |
MINING | Coal India Ltd. | 0.88 | 258.55 | 51 | 13,186 | 0.88 |
Vedanta Ltd. | 1.29 | 260.75 | 74 | 19,296 | 1.29 | |
OIL EXPLORATION/PRODUCTION | Oil & Natural Gas Corporation Ltd. | 1.23 | 161.85 | 114 | 18,451 | 1.23 |
PAINTS | Asian Paints Ltd. | 1.38 | 1126.8 | 18 | 20,282 | 1.36 |
PHARMACEUTICALS | Aurobindo Pharma Ltd. | 0.53 | 711 | 11 | 7,821 | 0.52 |
Cipla Ltd. | 0.78 | 548.75 | 21 | 11,524 | 0.77 | |
Dr. Reddy’s Laboratories Ltd. | 0.9 | 2725 | 5 | 13,625 | 0.91 | |
Lupin Ltd. | 0.7 | 1148.5 | 9 | 10,337 | 0.69 | |
Sun Pharmaceutical Industries Ltd. | 1.7 | 563 | 45 | 25,335 | 1.69 | |
POWER | NTPC Ltd. | 1.09 | 160.1 | 102 | 16,330 | 1.09 |
Power Grid Corporation of India Ltd. | 1.29 | 211.65 | 91 | 19,260 | 1.29 | |
Tata Power Co. Ltd. | 0.41 | 558.85 | 11 | 6,147 | 0.41 | |
REFINERIES | Bharat Petroleum Corporation Ltd. | 0.92 | 404.5 | 34 | 13,753 | 0.92 |
Indian Oil Corporation Ltd. | 1.09 | 955.3 | 17 | 16,240 | 1.09 | |
Reliance Industries Ltd. | 6.36 | 1489.55 | 64 | 95,331 | 6.38 | |
SHIPPING | Adani Ports and Special Economic Zone Ltd. | 0.81 | 375 | 32 | 12,000 | 0.80 |
STEEL AND STEEL PRODUCTS | Tata Steel Ltd. | 1.02 | 2432.1 | 6 | 14,593 | 0.98 |
TELECOMMUNICATION – EQUIPMENT | Bharti Infratel Ltd. | 0.73 | 23832.05 | – | – | – |
TELECOMMUNICATION – SERVICES | Bharti Airtel Ltd. | 1.39 | 408.8 | 51 | 20,849 | 1.39 |
Grand Total | 99.98 | 104914.05 | 3,039 | 1,495,244 | 100.00 |
The reason for this 2% error: Bharti Infratel (not a fancy stock but still has a high stock price) making it hard to incorporate in the portfolio. Also Tata Motors & Tata Motor DVR are two separate scripts. If you choose one of the two, your tracking error can be further reduced.
If you plan to replicate this strategy, I would advise that systematic monthly investment would be more sound that one shot (bullet) investment. NSE categorizes stocks in 23 categories. However if you are starting with a monthly plan, get the basics sectors right in the first 6 month (Banking 24%, O&G 15%, Technology 14%, Auto 11% & Tobacco 5.8%) then start adding the minor industries over the next 12 months. Second year onwards diversify in the main industries and gain exposure in the second & third weights of the main industries. Like that if you systematically buy exposure in 1-2 companies every month, you can reduce your tracking error & yet able to mimic the stock index returns within a 2% range. A ghost trading in which you track your portfolio performance to a SIP on your favorite mutual fund or Index might give you a nice bearing on the efficacy of your strategy.
Please note I am a passive investor. I trade only 1-2 times in a quarter. This strategy will involve trading one day in a month to rebalance.