Recent years have not been very good for developed markets like the U.S and Europe. A heavy debt burden and high level of unemployment have put pressure on the economic stability of the two regions and could continue to pressure both as the months pass.
In a consequent climate of sluggish economic growth, investors have duly turned their attention to the comparatively smaller developed markets which are rich in wealth resources and technology and which have shown more promise than the advanced ones.
Investor shift towards these smaller developed countries is attributable to the fact that these economies have potentially better fundamentals. While many might not be growing that much themselves, a few have lower debt burdens while they usually have easy access to quickly growing Asian markets right at their doorstep (Read The Five Best ETFs over the Past Five Years).
In this regard, investors should likely take a closer look at five areas in the region for investment; Singapore, Hong Kong, Japan, New Zealand, and Australia. Below, we briefly highlight some of the key points about these economies and a few ways that investors can play these areas in a diversified way with ETFs:
Although Hong Kong was hampered by the global economic slowdown, its integration with China helped it to recover quickly. At present, Hong Kong is one of the most competitive financial and business centers, not only in Asia but in the entire world.
Regulatory efficiency and openness to global commerce strongly support entrepreneurial dynamism, while overall macroeconomic stability minimizes uncertainty and promotes the destination as a major jumping off point for mainland exposure (Hong Kong ETF Investing).
iShares MSCI Hong Kong Index (EWH)
For a broader exposure in the Hong Kong market, investors should invest in EWH as the longest standing and most popular ETF tracking the Hong Kong market. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Hong Kong market, as measured by the MSCI Hong Kong Index.
The fund offers liquidity, trading in robust daily volumes of 2,541,700 shares and has assets under management of $1.53 billion. This AUM is invested in a small basket of 43 companies traded in the Hong Kong equity market. The fund appears to be highly concentrated in the top 10 stocks, where it has invested 55.9% of its assets.
In terms of sector holdings, the fund is heavily invested in financial sector with 60.8% exposure in financial companies. However, EWH is inclined towards defensive sectors also, like utilities and consumer discretionary (The Comprehensive Guide to Consumer Staples ETFs).
Defensive sector businesses remain more or less impervious to economic cycles and play a defensive role when the macro economy is under pressure. This exposure, at least to some extent, has helped the fund to set off the negative impact from financial sector.
Among individual holdings, AIA group takes the top spot with 12% of investment. EWH has not invested more than 6.26% allocation in any other holding. The fund charges just 52 basis points a year in fees, in line with other more Western-focused products. Over the year-to-date period, the fund has delivered a positive return of about 4.4%.
The Japanese economy faced a tough time in fiscal 2011 following the devastating earthquake and tsunami in the country. Add to it the several explosions that occurred in the Fukushima nuclear power plant, and the country was faced with a huge sell-off (Asia Ex-Japan ETF Investing).
In fact, on March 11, 2011, the Nikkei closed at ¥10,254.43 while after three days of the disaster it closed at ¥9,620.4, recording a fall of 6.2%. During the last trading session, Nikkei closed at ¥8,801.1, a fall of 14% from the day of the tragedy.
Despite the disaster and the headwinds facing the nation, Japan has managed to rebound, as it appears resilient when looking at its recent performance. Japanese equities have managed to bounce back and enter the year on a pretty strong note. The country continues to be a comparatively safe haven for investment in Asia, although some concerns are building over the strong yen.
iShares MSCI Japan Index Fund (EWJ)
For broad exposure in the Japanese market, investors should look to EWJ. The fund is the oldest and most popular ETF tracking the Japanese market. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Japanese market, as measured by the MSCI Japan Index.
Like other iShares country specific funds, this ETF also offers liquidity to investors with a trading volume of 11,988,400 shares a day. The fund has $4.84 billion assets under management which it invests in a large basket of 311 Japanese securities.
Unlike other iShares funds, this ETF offers the benefit of diversification to investors with a low concentration in the top 10 holdings. The fund invests only 22.4% of its asset base in these top holdings. It thereby rules out company risks to a large extent.
In terms of individual holdings, Toyota Motor Corp takes the top spot with 5.09% of the total investment, while Mitsubishi and Honda takes the second and third position respectively, with 2.87% and 2.53% of investment (Japan ETFs: One Year After Fukushima).
Among sectors, Industrials are given the top priority for investment with 20.5% of assets, while consumer discretionary and financials takes the other two positions with 37% of total investment.
The fund charges an expense ratio of 51 basis points a year and has delivered a negative return of -1.8% so far in 2012. However, the trailing one month performance of EWJ has been decent, as the product has 2.8% in the period.
Singapore has made a name for itself by banking on the few advantages that it has; a prime location and a well-educated workforce. The country took these few positives and turned it into a business hub for all of Southeast Asia. Now, the country has a major port, both in terms of air and sea, and developed an export-driven economy with massive industries in key sectors such as electronics and oil refining.
It is of note that the Singaporean government has been one of the best run in the world for quite some time. The country ranks highly on competitiveness surveys that focus on government institutions and market efficiency. Beyond this favorable business climate, Singapore has also taken steps to diversify its economy outside of manufacturing, transportation, and finance, going into tourism as well.
iShares MSCI Singapore Index Fund (EWS)
For broader exposure in the Singaporean market, investors should look to EWS as the oldest and most popular ETF tracking the Singapore market. The ETF seeks to provide investment results that correspond overall to the price and yield performance, before fees and expenses, of publicly traded securities in the Singapore market, as measured by the MSCI Singapore Index.
The fund provides exposure to 33 securities of the Singapore equity market. EWS has AUM of about $1.35 billion and has a total basket of 33 stocks. The fund also appears to be rich in volume at 2,596,700 shares, thereby offering liquidity to investors. However, it has a tilt towards the top 10 holdings in which it seems to invest 64% of its asset base.
The top three companies account for about 32% of total assets and include Singapore Telecom, DBS Group holdings, and United Overseas Bank Ltd. EWS has not invested more than 9.6% of assets in the rest of its holdings (read Time to Buy the Singapore ETFs).
When considering sector exposure, EWS is tilted towards a few market segments such as financials (46.5%), industrials (25%), and real estate (12%). These three comprise the top three sectors. Among the stocks, 92% in the fund are classified as large caps, although from a style perspective it is split down the middle in terms of growth, value, and blend.
This fund is also somewhat inexpensive when compared with other western products as it charges an expense ratio of 52 basis points a year. EWS has delivered a positive return of 13.8% so far in 2012.
For investors seeking exposure in a commodity-based developed market, Australia would be a great option. Australia is continuously striving to increase its integration with surging emerging Asian markets. Given the current investment climate, the country has a healthy economy that often ranks above other OECD member states.
The economy is moving along at a decent pace. Given the country’s relatively high discount rate, further policy options are at the nation’s disposal, implying that even if there is a global economic slowdown, Australia should be better prepared than most of its Western peers.
iShares MSCI Australia Index Fund (EWA)
For a broad exposure in the Australian market investors should invest in EWA, the longest standing and most popular ETF tracking the Australian market. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Australian market, as measured by the MSCI Australian Index.
This fund has amassed $2.28 billion in AUM, trading in volumes of roughly two million shares a day. The fund focuses in on large cap stocks and has a portfolio of about 72 securities in total, charging investors 52 basis points a year in fees. However, investors should note that EWA does pay out a pretty robust 4.6% per year, representing a solid yield for a country-specific fund.
Financials dominate the holdings of EWA, making up 45% of the total exposure although basic materials account for another 23% (Beware These Three Volatile Financial ETFs). Although the fund only puts 7% of its assets in any selected categories, but not large caps (all are in mid cap) it does have a nice breakdown between value and growth with both accounting for at least 40% of assets in the product.
Current top holdings include BHP Billiton (BHP), Commonwealth Bank of Australia, and Westpac Banking Corp (WBK). EWA has lost about 2.9% so far this year.
At a time when the global economy is surrounded with uncertainties, New Zealand is often looked upon as a safe haven for investment. This small size of this region, sometimes views as being geographically isolated, offer investors an option for capital investment.
The small size of the country acts in its favor in that it ensures that the nation can easily export to its much more populous trading partners, despite any ups and downs in their economies. Also, the economy is least exposed to European Issues. Investors should also note that the tax burden in the economy is the lowest, coupled with low level of unemployment.
iShares MSCI New Zealand Investable Market Index Fund (ENZL)
ENZL tracks the MSCI New Zealand Investable Market Index which looks to measure the performance of equities in the nation. The fund holds a small basket of 24 securities in total while charging investors 51 basis points a year in fees.
The ETF has amassed $110 million in assets while doing volumes of 58,500 shares a day. This fund is also concentrated in the top 10 holdings at 71.6%.
In terms of holdings, Telecom Corp of New Zealand (NZT) takes the top spot at 17.7%. It is closely trailed by Fletcher Building Ltd and Auckland International Airport which accounts for another 22.3% of the holdings (see Is It Time To Buy The New Zealand).
Among sector holdings, Telecommunication, Materials, and Consumer Discretionary take the top 3 positions with 22.06%, 17.3%, and 14.5% of investment, respectively.
In terms of performance, ENZL has done well despite the global economic uncertainty as the fund has gained about 5.1% so far this year and roughly 13.6% since inception.
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