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How is the Current Trade Scenario Impacting Asia ETFs?

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This year so far has been marked by ups and downs over fears of aggressive tightening by the Fed and trade disputes between the United States and the rest of the world, primarily China. However, tensions have been easing, with signs of negotiations between China and the United States inducing calm in the markets.

Moreover, President Trump’s indication that he will be willing to rejoin the Trans Pacific Partnership (TPP) if the deal is better than the one offered to his predecessor, Barack Obama, further reduced trade war fears. On the geopolitical front, China and Japan have agreed to work closely on the North Korea issue, in a rare show of bipartisanship between Asia’s two largest countries.

Into the Headlines

The headline that caught the eyes of multiple market pundits was Trump’s willingness to rejoin the TPP. "Would only join TPP if the deal were substantially better than the deal offered to Pres. Obama. We already have BILATERAL deals with six of the eleven nations in TPP, and are working to make a deal with the biggest of those nations, Japan, who has hit us hard on trade for years!" Trump tweeted last week.

Trump’s intent received mixed reviews. Although member nations welcomed the prospect, they were quick to point out Trump’s temperamental nature and possibility of him backing out on talks. Moreover, member nations were not completely open to renegotiations. “If the United States, it turns out, do genuinely wish to rejoin, that triggers a whole new process,” New Zealand Prime Minister Jacinda Ardern said.

The TPP was formed to set a framework that will force China to open its markets. Americans are likely to benefit if the United States rejoins the TPP. Most importantly, growing tensions between the United States and China have been weighing on American farmers, who are likely to benefit from access to Asian markets such as Japan through the TPP.

Another key highlight this week was the talks held between the foreign ministers of China and Japan in Tokyo. Both countries have agreed to work together to get North Korea to abandon its nuclear program and repair relations at a time when uncertainty over trade with Washington has been bothering policymakers (read: China ETFs to Watch Amid Signs of Weak Economic Growth).  

Both China and Japan are seeking each other’s cooperation to tackle tariffs imposed by the United States. Moreover, improving relations with China might help Japanese Prime Minister Shinzo Abe to get positive points ahead of a party leadership election later this year, at a time when his chances have dimmed owing to allegations of cronyism and government cover-ups (read: BoJ Mulling Over a Stimulus Exit: ETFs in Focus).

Let us now discuss a few ETFs that might be impacted by the recent spate of events.

iShares MSCI Japan ETF (EWJ - Free Report)

This fund is suitable for investors looking for broad-based exposure to the Japanese economy. It seeks to invest in large-cap companies.

The fund has AUM of $21.3 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 21.0%, 20.1% and 12.6% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Sony Corp are the top three holdings of the fund, with 4.6%, 2.2% and 1.7% exposure, respectively. It has returned 0.5% year to date and 20.6% in a year.

iShares China Large-Cap ETF (FXI - Free Report)

This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.

It has AUM of $4.6 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy and Technology are the top three allocations of the fund, with 48.7%, 11.9 % and 11.1% exposure, respectively. From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top three allocations of the fund, with 9.0%, 8.5% and 8.4% exposure, respectively. The fund has returned 3.1% year to date and 27.4% in a year.

iShares Core MSCI Pacific ETF (IPAC - Free Report)

This fund seeks to provide exposure to equities in the Asia Pacific region.

It has AUM of $914.1 million and charges a fee of 10 basis points a year. From a geographical perspective, the fund has high exposure to Japan, Australia and Hong Kong, with 67.5%, 17.8% and 9.2% exposure, respectively. From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 18.6%, 17.6% and 16.2% exposure, respectively. From an individual holding perspective, Toyota Motor Corp, AIA Group Ltd and Commonwealth Bank of Australia are the top three allocations of the fund, with 2.6%, 1.7% and 1.5% exposure, respectively. The fund has returned 0.3% year to date and 18.7% in a year.

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