Market Overview

Taking A Broad Approach To Japan Exposure

Taking A Broad Approach To Japan Exposure

Japan is the world's third-largest economy and home to some impressive equity market performances this year. For example, the MSCI Japan Index is up nearly 20 percent year to date after hitting a 52-week high Tuesday.

As one of the largest developed market economies, Japan is widely represented in the universe of single-country exchange-traded funds, but many investors often prefer a diverse approach to international markets. That sentiment underscores the popularity of ETFs and index funds following the MSCI EAFE Index and competing benchmarks.

Several of this year's top asset-gathering ETFs feature diverse approaches to ex-US developed markets, including large weights to Japanese stocks. Moreover, these funds feature low fees, which can help long-term investors minimize costs.

After The Election ...

“Last week, Japanese Prime Minister Shinzo Abe's Liberal Democratic Party (LDP) and its coalition partners scored a convincing win that will maintain a large majority in both houses of parliament,” said CFRA Research director of ETF & mutual fund research Todd Rosenbluth in a note out Tuesday. “This should extend the lifespan of ‘Abenomics,’ including the Bank of Japan's mega stimulus and help Japan's economic prospects, according to US iShares Investment Strategist Tushar Yadava. While Japan is the largest of the developed international markets, exposure in popular ETFs can differ.”

Home to $81.6 billion in assets under management, the iShares MSCI EAFE ETF (NYSE: EFA) is the largest ex-U.S. ETF and one of the largest ETFs tracking any asset class. EFA allocates 23.8 percent of its weight to Japan, 640 basis points more than its second-largest country weight, the U.K.

While EFA is not particularly expensive with an annual fee of 0.33 percent, the ETF faces competition, some from within its own family. The iShares Core MSCI EAFE ETF (BATS: IEFA) is adding new assets at a rapid clip and only a few ETFs have seen larger 2017 inflows. IEFA, which charges just 0.08 percent per year, features a Japan weight of 24.8 percent, or 720 basis points above its U.K. exposure.

Vanguard, Too

The Vanguard FTSE Developed Markets ETF (NYSE: VEA) is another one of this year's prolific asset gatherers among low-cost, ex-U.S. funds.

“Developed and diversified international equity ETFs have been very popular in 2017, with iShares Core MSCI EAFE and Vanguard FTSE Developed Markets gathering the second ($19 billion net inflows) and third ($16 billion) most new money year to date through October 27, according to data,” said Rosenbluth. “An additional $9.5 billion and $3.6 billion flowed into iShares MSCI EAFE and Schwab International Equity ETF this year. The performance success of these ETFs has been aided by a rebound in Japanese equities.”

VEA, which charges just 0.07 percent annually, had a 21.1 percent weight to Japan at the end of the third quarter. CFRA has Market-Weight ratings on EFA, IEFA and VEA.

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Todd Shriber owns shares of VEA.


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