Asia Pacific ETF's Have Very Different Portfolio Compositions
The top ETF's in this sector are taking very different stances on weightings of various countries
Asia Pacific ETF's
Asia Pacific ETF’s are Exchange Traded Funds that invest in equities based in the Pacific basin. They’re often lumped into one broader category by investment advisors, but as we will demonstrate, these funds vary greatly from portfolio to portfolio in their proportional allocations to the various Pacific nations. So much so that the top four broad category funds have very different return profiles.
The two largest stock indexes for the region are maintained by different research firms- Morgan Stanley Capital International (MSCI) and the Financial Times Stock Exchange (FTSE). The Developed Market indexes of these two firms has a variance of 10% in make-up. 1 Importantly for Pacific ETF’s, FTSE treats South Korea as a Developed market whereas MSCI treats it as an Emerging market. 2, 3 This doesn’t describe all of the divergence in approach between the major Pacific ETF’s- even ETF’s with the same countries included in their portfolio weight them differently.
There are many ETF’s with heavy market capitalization that are country specific in the Asia Pacific ETF category. The second and third largest Pacific ETF’s are the iShares Taiwan and South Korea country-specific ETF’s. For our discussion today, we’re focusing on the largest passively managed, multi-country ETF’s billed as “Pacific” region ETF’s. Some of them include only developed markets, whereas others incorporate emerging markets as well.
By the Numbers
The Pacific ETF with the largest Year To Date (YTD) returns also happens to be heavily weighted toward Emerging Markets- AAJX is 80% Emerging to 20% Developed market weighted. By comparison, IPAC has returned only half as much this year YTD, but is 97% Developed Market weighted. It’s arguable that the “tilt,” or style-weighting of some Pacific ETF’s is contributing to their apparent recent outperformance of peers.
This underscores our thesis: that investors need to be selective with their Pacific ETF allocations. If one were to allocate to the best performers only, there’s a great chance that there will be relatively large allocations to Emerging Markets underlying those investments. If they already had adequate Emerging Markets for their needs, they might end up surprised by their portfolio’s performance down the road.
The same can be said of Market sector and Pacific ETF’s- it’s worth the effort of checking into the sector weightings of your ETF. Financial sector stocks tend to be ever present in Pacific portfolios. EPP has a 39% allocation to the Financial sector, for instance. Other sectors that are widely variable among the top Pacific ETF’s are Real Estate, Technology, and Industrials.
The 4 Largest Asia Pacific ETF's
VPL Top 5 Portfolio Holdings
AAXJ Top 5 Portfolio Holdings
EPP Top 5 Portfolio Holdings
IPAC Top 5 Portfolio Holdings
VPL Country Portfolio Allocation
AAJX Country Portfolio Allocation
EPP Country Portfolio Allocation
IPAC Country Portfolio Allocation
VPL Market Tier Weightings
AAXJ Market Tier Weightings
EPP Market Tier Weightings
IPAC Market Tier Weightings
Conclusion
Asia Pacific ETF’s can be an excellent way to diversify portfolios for long-term investors. As we’ve seen, sector, country, and market tier weighting among competing Asia Pacific ETF’s can make a large difference in portfolio compositions. Consequently, outcomes will be best managed by careful analysis of target Pacific ETF’s versus the broader portfolio. When you’ve made the choice to allocate to the Asia Pacific region, it pays to be specific about what kind of investment you’re really looking for.
Thanks for joining us in our discussion of Asia Pacific ETF’s. We’re looking to do a couple of related articles on different sectors. We’ll be posting more Oregon and Pacific Northwest related news and analysis next up as well. As always, your comments, questions, and concerns are welcome.
All data and information used from publicly available information on funds and corporations via Vanguard, BlackRock (iShares), and etfdb.com.
Meet the Author & Portfolio Manager
Victor Schramm is a Certified Fund Specialist (CFS®), with expertise in Mutual Funds & Variable Annuity Separate Accounts. He focuses on long term investing geared toward our annuity clients as a Fee Only Investment Advisor. He lives in Portland, OR.
Victor Schramm, CFS®Analyst & Portfolio Manager
Disclaimer:
This information is solely a representation of publicly available facts intended for educational use only. This is not a solicitation to buy or sell any public or private Security, in any city named in the article or elsewhere. Exchange Traded Fund (ETF) composition and weighting is not a market timing tool for buying or selling any security, and should not be used as the sole criterion of investment selections.