What's in your Asia-Pacific ETF? -

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. I wrote my earliest review of this segment in 2017, and this is an update to that story for the Spring of 2019. Interestingly, the field of top competitors has become only more diverse since the first writing of this article- two additional Funds tracking two separate Indexes have been added for review in 2019.

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 South Korea and India country-specific ETF’s, with the top 20 loaded with other country-specific Funds. 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 2nd largest Year To Date (YTD) returns also happens to be heavily weighted toward Emerging Markets- AAJX is 66% Emerging to 34% Developed market weighted. By comparison, IPAC has returned over 3% less this year, but is 99% Developed Market weighted. In years past, this “tilt” of Pacific funds toward the emerging sectors has been a double edged sword- when these emerging countries (namely, China) have done poorly, the funds with this strategy have underperformed the sector at large.

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 in a given year. 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 37% 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.