An Indian ETF Outperforms Its Benchmark Through Strategic Trade
In a notable development within India's passive investment landscape, an exchange-traded fund has managed to outperform the very index it is designed to track. The Aditya Birla Sun Life Nifty 50 ETF has delivered a gain of almost 12% since the financial year began on April 1. This performance puts it marginally ahead of the NSE Nifty 50 Total Return Index, a rare feat in an industry where management fees typically cause funds to lag behind their benchmarks.
The Secret Behind the Outperformance
According to Deepak Yadav, Head of Passive Business at Aditya Birla Sun Life AMC Ltd., the fund's success stems from a strategic decision. The ETF tendered shares of a large, unnamed IT company into a buyback offer at a significant 16% premium. This savvy move generated extra returns that helped offset the fund's management fees and contributed to its slight edge over the index.
Yadav explained that this represents a conscious shift in strategy. The fund house is now selectively exploiting such special corporate actions, even if it introduces a minor tracking error in the short term. The focus, he argues, should be on the long-term tracking difference—the net performance gap over time—rather than minimizing day-to-day tracking error.
A Shift Towards 'Passive-Plus' Strategies in India
This event highlights a growing trend in India's maturing passive market. Fund managers are beginning to adopt enhanced-index or passive-plus strategies, which have long been used in global markets. These approaches allow passive funds to seek small, incremental gains over their benchmark through low-risk arbitrage opportunities like buybacks, rights issues, and tender offers.
Aditya Birla's strategy is not isolated. The same buyback tender was also deployed in its ETF tracking the Nifty IT Total Return Index, which has beaten its benchmark by over 21 basis points since March 31, thanks to a larger exposure to the involved company. Furthermore, other asset managers like PPFAS Mutual Fund have recently announced funds explicitly aiming to generate alpha over indices like the NSE Nifty 100.
Implications for the Future of Passive Investing
The firm has stated it will continue to pursue these selective opportunities but within strict internal limits to prevent tracking error from exceeding acceptable levels. This evolution suggests that the line between passive and active management in India is becoming slightly blurred, as ETF providers seek new ways to add value and differentiate themselves in a competitive market.
For long-term investors, this development underscores the importance of looking beyond a fund's stated objective and understanding the nuanced strategies a passive manager might employ. The success of the Aditya Birla Sun Life Nifty 50 ETF demonstrates how tactical decisions within a passive framework can lead to measurable outperformance, challenging the conventional wisdom that index trackers must always underperform their benchmarks after fees.
