Sorting Through Asian ETFs

By: Ron_Rowland

You shouldn’t be surprised if I tell you I like Asia. I talk about Asia frequently, both in my Money and Markets columns and in International ETF Trader.

The reason is simple: Asia is where I see the best growth in today’s globalized economy. You can find good opportunities in Latin America and a few other places, too. But Asia is the Big Kahuna! Every serious investor has to be involved there to some degree.

Investing in Asia has never been easier, thanks to the rise of exchange traded funds (ETFs). Yet I find that many investors are still reluctant — mainly because they’re confused. They look at all the Asia-related alternatives and just don’t know where to start.

Today my goal is to give you some answers. We’ll break down the list of Asia-focused ETFs into smaller bites that are easier to digest.

Just What Is Asia?

Every serious investor should consider Asia.

The first problem we run into is a definition: Exactly what constitutes Asia? Geologists will tell you that the regions we call Europe and Asia are really one big land mass called Eurasia. A big part of Asia is actually Western Russia. The capital is Moscow, which is back in Europe.

Also, what do you do with the Middle East? The Arabian Peninsula is connected to Asia but largely stands on its own, culturally and economically. And is Australia part of Asia?

We can quibble about these details, and indeed they are important. For investment purposes, though, Asia usually means China, India, Japan and the surrounding smaller nations. Sometimes you’ll see the term “Asia Pacific,” which is usually meant to include Australia and New Zealand.

All-Asia ETFs

Believe it or not, even with more than 1,000 ETFs on the market today, none of them provide all of Asia in a single fund. They all exclude something. The All-Asia ETF has yet to be invented.

The one that comes closest to fitting this description is BLDRS Asia 50 ADR (ADRA). It tries to include both developed and emerging markets, both Asia and Pacific, and even Japan. However, since it only invests in companies with U.S.-listed ADRs (American Depositary Receipts), only holds 50 of them, and is capitalization weighted, it doesn’t really provide a true picture of Asian markets.

Ex-Something

You may have seen funds or ETFs that claim to cover Asia and include “Ex-Japan” in their name. This means they exclude Japan. Why? It’s not because they think the country Japan is a bad investment — though that has been a good strategy with Japan for most of the past 20 years.

Japan is a bigger hill than many investors want to climb.

The problem is Japan’s stock market is so huge — relatively speaking — that it tends to “crowd out” attempts to cover the broader region. Investors have plenty of ways to get involved in Japan by itself, so most managers design their funds to include the rest of the Asia markets.

Many other Asia ETFs exclude emerging markets or developed markets, although it may not be obvious from their names.

Developed, Emerging, and Frontier

Once we get past the geography lesson, we can break down Asia further into developed, emerging and frontier markets.

Developed markets are the fully-modernized nations. Japan, Hong Kong, Australia, Singapore, and New Zealand are the only Asia-region countries in this group based on the MSCI classification system. They have extensive trading relationships with the Western world and integrated financial markets.

Currently just one ETF covers this group: Vanguard Pacific (VPL). Since VPL is capitalization-weighted, the allocations to the five countries are very skewed. Japan has a 62 percent allocation while New Zealand has less than half a percent.

Most ETFs that follow this category exclude Japan, for the reasons discussed above. The best strategy for long-term investors is to combine a good Japan ETF like iShares MSCI Japan (EWJ) with a regional ETF such as iShares MSCI Pacific ex-Japan (EPP). Since EPP excludes Japan, Australia is its largest holding at 65 percent of the fund.

Emerging markets are on the development road but not there just yet. China and India, while huge and very modern in some places, still have vast undeveloped areas. Ditto for many other countries in the region, even some big ones like Malaysia.

Emerging markets are full of contrast.

The emerging Asia niche is well-covered by ETFs. Take a look at SPDR S&P Emerging Asia Pacific (GMF) or First Trust ISE Chindia Index Fund (FNI).

One of my favorite ETFs representing Asia is a cross between EPP and GMF — iShares MSCI AC Asia ex-Japan (AAXJ). The “AC” in its name stands for all country, which means it includes both developed and emerging markets. As the name implies, AAXJ is also “ex-Japan.”

It excludes Australia and New Zealand as well, which is why the word “Pacific” is not in the name. AAXJ’s largest country allocations include China 26 percent, South Korea 16 percent, Taiwan 12 percent and India 12 percent.

Frontier markets are just now beginning to develop. They’re on the right track and have good long-term prospects, but they are not yet ready for “prime time.” The only ETF in this category is the single-country Market Vectors Vietnam ETF (VNM).

Asia A La Carte

Right now, I believe the best way to invest in Asia is to take small positions in several single-country ETFs. Japan, China, and India all have many to choose from, and I discussed the options for Australia and New Zealand last week.

You can customize your exposure with many additional single-country Asia ETFs. Consider iShares MSCI Hong Kong (EWH), iShares MSCI Singapore (EWS), iShares MSCI South Korea (EWY), iShares MSCI Taiwan (EWT), Market Vectors Indonesia (IDX), iShares MSCI Thailand (THD), iShares MSCI Malaysia (EWM), or one of the other single-country ETFs. Keep each holding small and be prepared to ride out any volatility.

In fact, that’s good advice for any international ETF. You never want to put all your eggs in one basket. Likewise, unless you are a trading pro you should probably not try to catch the short-term ups and downs.

Also keep in mind that trading hours in Asian markets have no overlap with U.S. markets. This means you need to be cautious about timing your entries — and your exits. One day can make a big difference.

Best wishes,

Ron

P.S. Be sure to check out tonight’s Money and Markets TV show: What’s Beyond the Third Quarter Earnings Reports? Tune in tonight, November 4, at 7 P.M. Eastern time (4:00 P.M. Pacific). Simply go to www.weissmoneynetwork.com and follow the on-screen instructions. Access is free and no registration is required.

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