Japan isn’t getting much love in the eyes of investors these days. The benchmark Nikkei is down significantly from the highs of the early 1990s and the country continues to feel the impact of a high debt burden. Furthermore, the yen has remained strong adding further pressure to the struggling exporting economy. As such, many believe that Japan won’t be an Asian Pacific powerhouse any time soon like neighboring economies [see Free Report: How To Pick The Right ETF Every Time].
Other countries in the region are healthier with far more attractive growth prospects, but many of the Asia Pacific ETFs include Japan as a core holding because of the massive size of their economy. For investors who don’t want Japanese exposure, but are eager to tap into booming Asia Pacific region ought to take a closer look at the iShares MSCI Pacific ex-Japan Index Fund (EPP).
In A Nutshell
The iShares MSCI Pacific ex-Japan Index Fund tracks the performance of the MSCI Pacific ex-Japan Index, an index comprised of securities from Asia Pacific countries like Australia, Hong Kong, Singapore and New Zealand but does not include Japanese exposure. EPP began trading in October of 2001, making this fund one of the first of its kind [see also Asia-Centric ETFdb Portfolio].
What Makes EPP Unique?
Investors looking to get broad-based Asia Pacific exposure may be attracted to EPP, but the fund doesn’t invest with large scale diversification in mind. Nearly two-thirds of its holdings are Australian large and mega cap companies, and half of the fund is invested in financial securities. Because of the tight focus on one region, EPP only holds 150 securities.
How It Fits
Investors looking for exposure to the Asia Pacific region with a particular interest in the Australian market will find EPP to be a valuable addition to their portfolio. Because of its focus on one region of the world, this fund isn’t appropriate as a core holding for those looking to establish broad international market exposure [see also Ex-Japan ETFs In Focus].
However, for those interested in rounding out their Asia exposure, but are wary of Japan’s economic outlook, EPP can serve as a very valuable instrument.
What It’ll Cost You
The iShares MSCI Pacific ex-Japan Index Fund charges 0.50% in annual expense fees, putting it towards the cheaper end of the cost spectrum among Asia Pacific Equities ETFs which feature an average cost of 0.62% with a range of 0.14% to 0.80%. Cost-conscious investors should also note that this ETF is not available for commission-free trading at this time [see EPP Realtime Rating].
Under The Hood
EPP is comprised of roughly 150 individual securities, allocating just over one-third of its total assets to the top-ten holdings alone. From a market capitalization perspective, this ETF is dominated by giant and large cap stocks; investors looking for small cap Asia specific exposure should consider alternatives as this fund features virtually no allocation to small and micro caps. The fund is heavily weighted towards financials, with over one-third of total assets going to stocks in this corner of the market. EPP also rounds out exposure to the real estate and basic materials sectors, while health care and technology receive very minimal representation.
Top holdings include well-known firms like BHP Billiton (BHPLF), Commonwealth Bank of Australia (CBA), and Rio Tinto (RIO). From a country breakdown perspective, nearly two-thirds of EPP’s holdings come from Australia, while stocks from Hong Kong make up the next biggest chunk of the portfolio followed by Singapore [see EPP Holdings].
Yield, Volatility and Performance
This ETF offers a semiannual dividend distribution and its expected volatility should fall just above broad U.S. markets but below emerging market benchmarks given its heavy tilt towards developed market securities. From a performance perspective, EPP fell alongside major equity indexes during the 2008 slump, shedding close to 48% that year. As expected, this ETF recovered alongside major equity benchmarks in the following years; EPP managed to clinch gains of 63% in 2009 and 17% in 2010. This ETF turned in a sour performance in 2011, shedding nearly 14% during an otherwise very choppy year for stock markets [see also 101 ETF Lessons Every Financial Advisor Should Learn].
The ETFs profiled below offer generally similar exposure as EPP, although there are a number of distinguishing characteristics to each one:
- PowerShares FTSE RAFI Asia Pacific ex-Japan Portfolio (PAF): This ETF shares many of the same traits as EPP including its ex-Japan focus; but instead of selecting and weighting securities by market cap, PAF uses the RAFI methodology which is based on fundamental measures like firm size, book value, income, sales, and dividends.
- First Trust Asia Pacific Ex-Japan AlphaDEX Fund (FPA): This fund uses the AlphaDEX methodology which is designed to identify securities that will outperform the broader market. With 100 holdings in total, this fund is well suited for investors who believe in the AlphaDEX approach, but the 0.80% expense ratio is quite high compared to its peers.
- WisdomTree Asia Pacific ex-Japan Fund (AXJL): This unique WisdomTree offering offers ex-Japan exposure with a twist; the underlying portfolio is fundamentally weighted and consists entirely of dividend-paying companies in the Asia Pacific region.
Disclosure: No positions at time of writing.
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