The CPSE Exchange-Traded Fund’s has raised thousands of crore in the last couple of years for the government, including the latest one. One of the big advantages that the CPSE ETF offers is the upfront discount of 4.5% to reference price which is an added incentive for investors. The CPSE ETF is a carefully chosen portfolio of the combination of Maharatnas, Navaratnas and Mini Ratnas among the PSUs. There is a cap of 20% on individual stocks in some ETFS and 15% in other ETFs. This keeps concentration of risk in check. But, sectoral concentration of CPSE ETF's portfolio is strongly in favour of the energy sector with power, oil and petroleum products accounting for over 60% of the portfolio. This makes the ETF vulnerable to just one set of themes.

Let us now look at the returns on the CPSE ETF and how it has panned out historically. On December 2018 the fund generated 3.78% over 3 years and a discouraging (-19.83%) over 1 year. That is probably worse than most other asset classes and that is not encouraging. This underperformance in the last one year was largely due to the underperformance of the energy sector for various reasons related to the price of crude in global markets. This underlines that government-owned companies are not exactly wealth creators. If one were to look at the CPSE portfolio vis-à-vis the CPSE index, the performance has been tepid and at par. It is hard to fathom if they can really add value to one’s portfolio at this point of time, when the major story is consumer demand and the CPSE ETF has no story to play that consumer theme.

However, we must remember that there are some stocks like BPCL, CONCOR and SCI that are divestment candidates and many more could follow. Also the likes of BHEL can be strong plays on the revival of the capital goods and power sector. Similarly, BEL can be a solid play if the government decides to go aggressively after in-sourcing defence manufacturing. Then the PSU banks are great plays on a business turnaround with the worst already over. You need to be selective but take a view of at least 3 years to make profits on the CPSE ETF.