An exchange traded fund, popularly known by the acronym ETF, is a popular and convenient way to access stock markets across the globe and benefit from opportunities in those regions while adding the "geographical diversification" dimension to an investor’s portfolio. ETFs are typically designed to track an index or a basket of assets, thereby providing an easy option to hold a basket of stocks through a single investment. Investors prefer ETFs as an investment vehicle to venture outside the homeland, as these funds help investors skip the cumbersome steps of selecting individual stocks for investment and tracking them individually.
The Asia-Pacific region is hard to miss when looking at the preferred destinations for investments of this nature. Technically covering about 22% of global land area, the region offers immense possibilities. Golden opportunities exist to invest in countries including China, Australia, South Korea, Taiwan, India, Singapore, Japan and Hong Kong, among others. (See also: Top 3 ETFs For Investing in China.) No wonder then that more than 35 ETFs are tracking these markets! We take a look at five of them, shortlisted on assets, average volume and performance (the list below is in no specific order).
iShares MSCI South Korea Capped ETF
Launched in May 2000, the BlackRock iShares MSCI South Korea Capped ETF (NYSE: EWY) is a long-running single country ETF targeting mid- and large-cap companies in South Korea. Considering the fact that direct investment in companies such as Samsung Electronics Company Limited (005930.KS) or Hyundai Motor Company (005380.KS) is difficult for U.S. investors (other than in OTC markets, which suffer from problems including lack of transparency and liquidity), this ETF is a good chance to hold these stocks, albeit indirectly. The iShares MSCI South Korea Capped ETF has a corpus of $3.25 billion and an expense ratio of 0.62%.
The fund has a total of 100 plus holdings, with the top ten holdings weighing about 45%. The allocation to a particular stock is very limited, mostly under 1-2%; however, Samsung is overweight with a 21% allocation. The top five holdings are Samsung Electronics Company Limited (21%), Hyundai Motors Company (4%), SK Hynix Inc. (3.5%), Shinhan Financial Group Company Limited (2.8%) and Naver Corporation (2.5%), adding up to a total of 34%. The sectorwise breakup shows information technology (36%) as the top sector allocation, followed by consumer discretionary (16%), financials (14%) and industrials (12%). These sectors together add up to 78% of the portfolio with another 16% added by consumer staples and materials, while the remaining is filled by energy, telecommunications, utilities and health care.
iShares MSCI Taiwan ETF
The BlackRock iShares MSCI Taiwan ETF (NYSE: EWT), launched in the summer of 2000, invests primarily in Taiwanese equities. With the number of stock holdings around 100, the fund gets access to 85% of the stock market in Taiwan, largely covering the mid-cap and large-cap companies. The top ten stock holdings of the fund make up approximately 51% of the portfolio, while the top five add to 40%; these are Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) (23%), Hon Hai Precision Industry Company Limited (9%), Mediatek Inc. (3%), Cathay Financial Holding Company Limited (3%) and Chunghwa Telecom Company Limited (3%). The majority of its stocks have less than 1% allocation, which means less dependence on the movement of any particular stock; however, the allocation towards Taiwan Semiconductor Manufacturing is surely overweight.
The fund is diversified into eight sectors with information technology playing the lead with a 57% allocation. The other two prominent sectors are financials (18%) and materials (9%), overall, the top three sectors make up 84% of the fund’s portfolio. The fund has an asset base of about $3.13 billion with a high trading volume. It has an expense ratio of 0.62%. (See also: ETF Analysis: iShares MSCI Taiwan)
Vanguard FTSE Pacific ETF
The Vanguard FTSE Pacific ETF (NYSE: VPL) is not a country-specific fund; it holds stocks of companies from countries including Japan, Australia, Hong Kong, New Zealand and Singapore. Japan is one of its dominant areas of investment with 62% followed by Australia at 16%, with South Korea, Hong Kong, Singapore and New Zealand at 10%, 9%, 3% and less than 1% each. The fund seeks to track the FTSE Developed Asia Pacific All Cap Index with a passively managed, full-replication approach.
Vanguard FTSE Pacific ETF has an asset base of $ 2.87 billion and a huge portfolio of 836 stocks, with the top largest holdings adding up to 15% of the total net assets. The top holdings are Toyota Motor Corporation, Samsung Electronics Company Limited, Mitsubishi UFJ Financial Group Inc, Commonwealth Bank of Australia, Westpac Banking Corporation, AIA Group Limited, BHP Billiton Limited, National Australia Bank Limited, Honda Motor Company Limited and Australia & New Zealand Banking Group Limited. The funds expense ratio at 0.12% is among the lowest in the category of such funds.
iShares MSCI All Country Asia Ex-Japan Index Fund
Launched in 2008, the BlackRock iShares MSCI All Country Asia Ex-Japan Index Fund (NASDAQ:AAXJ) provides international diversification to investors while covering the emerging and developing Asian region (excluding Japan). The fund is currently invested in countries like China (33%), South Korea (18%), Taiwan (14%), India (10%), Hong Kong (7%), Singapore (5%), Malaysia (4%), Indonesia (3%), Thailand (3%) and the Philippines (2%).
The fund’s holdings provide exposure to as many as 600 large and mid-sized companies from its universe of investment. Out of the current top ten holdings (23% weightage), six companies are from mainland China, two from Taiwan and one each from South Korea and Hong Kong. However, the allocations keep changing and so can the dominance as well as stock dominance. The holdings are spread across ten different sectors with financials (34%) and information technology (21%), adding to more than 50% of the funds allocation. The fund has a corpus of $2.7 billion and an expense ratio of 0.68%.
iShares Core MSCI Pacific ETF
The iShares Core MSCI Pacific ETF (NYSE: IPAC) is a year-old fund providing exposure to the Asia-Pacific region with major focus on Japan (68%), Australia (18%), Hong Kong (9%) and Singapore (4%). The fund has an impressive corpus of $601 million considering it was launched only in June 2014. The iShares Core MSCI Pacific ETF has also been able to provide a comprehensive access to the multi-cap stocks from the region at an expense ratio of 0.14%
Among sectors, the fund’s top three picks are the financials (29%), consumer discretionary (17%) and industrials (16%), adding up to a total of 62%. The iShares Core MSCI Pacific ETF has a large portfolio of about 850 stocks, with the top ten holdings aggregating to 15% while the top five to about 10% reflecting a low concentration ratio for the fund. The funds current five holdings are Toyota Motor Corporation, Commonwealth Bank of Australia, Mitsubishi UFJ Financial Group Inc, AIA Group Limited and Westpac Banking Corporation.
The Bottom Line
While these ETFs offer a great way to venture into foreign stock markets, investors must bear in mind the risks associated with them, for example the stock market risk or country-specific or regional risk. Investors should also keep a track of the expense ratio as well the style of investing before picking an ETF. Within ETFs there is another variety available called leveraged or inverse ETFs that present a high risk-reward scenario; investors should understand them before investing to avoid unexpected surprises later on. (See also: Top Tips For Trading ETFs)
The figures have been rounded off. Portfolio details as of October 7, 2015.