Rolle im Portfolio
The fund provides equity exposure to the largest companies in Japan, one of the biggest economies on the globe, and could therefore be considered for use as a core component of a well-diversified portfolio. However, given its narrow geographic exposure, this ETF is probably best utilised as a tactical or satellite holding within a diversified portfolio. Before considering an investment in this ETF--either as a core building block or a tactical tool--investors should be aware of existing exposure to Japan through other holdings (for example, Japanese equities comprise nearly 10% of the MSCI World Index) to avoid unintentionally overweighting Japanese shares.
The MSCI Japan index is well diversified at the stock level, with top constituent Toyota representing around 6% of its value. However, the index is relatively more concentrated at the sector level, with three sectors, namely consumer discretionary, financials and industrials, accounting for about 19-21% of its value each.
Fundamentale Analyse
The Japanese economy suffered for decades under deflation, a rising yen, corporate deleveraging, and weak political leadership; all weighing on the stock market as well. Over the trailing 20-year period, the MSCI Japan Index underperformed the MSCI World Index by an annualised 7.5%, measured in base currency.
However, over the trailing 3-year period, Japanese equities have outperformed global equities by an annualised 3.6%. The stock market has benefited from the implementation of the so-called “Abenomics” in 2013, passing a stimulus package focused on job creation and infrastructure projects. Prime Minister Abe’s unorthodox monetary policy has reined in deflation and reignited consumer confidence and spending. But there are fears the second consumption tax hike in 2015 could further hurt the economy’s nascent recovery, as the first tax hike in April 2014 caused a 6.5% GDP contraction – essentially reversing the Q1 GDP growth.
Besides, Abenomics fails to address more significant long-term challenges like a huge government debt standing at 240% of GDP, a shrinking and aging population and weak consumption. In addition, the IMF now sees some risk that the policy measures could prove less effective than expected in terms of supporting growth, failing to increase nominal wages, sustaining the recent increase in inflation expectations, or boosting private investment.
Demographics remain one of the country’s biggest challenges. People aged over 65 represent about a quarter of the overall population. The ballooning debt is partly due to expanding health and social costs associated with this development.
Meanwhile, the Yen continue to play a vital role in the health of the Japanese economy. On the one hand, the country is heavily export dependent, with companies like Toyota or Sony generating 70-80% of their revenue abroad. On the other hand, Japan lacks natural resources and as such relies on commodity imports, in particular energy. Prior to Fukushima, Japan generated 30% of its electrical power from nuclear reactors but they have all since been disconnected from the grid. Higher import costs due to rising energy prices and a weakening Yen have contributed to a ballooning deficit.
Despite the economy stagnating for almost two decades, the industrial sector – one of the largest in the index – is still one of the most advanced and innovative in the world, with the automobile industry being particularly strong.
Going forward, the Trans-Pacific Partnership free trade agreement should benefit the Japanese economy but will also require major changes in some of the most protected industries. Further steps taken by the government include improving the flexibility and the productivity of the labour force, which is hampered by long-term job security, seniority-based wages, limit female participation in the workforce, and company-based labour unions.
Indexkonstruktion
The MSCI Japan Index includes approximately 320 of the largest stocks of publicly-traded companies based in Japan. Components must meet minimum criteria for liquidity, foreign ownership restrictions, and a waiting period for newly-listed stocks. The securities are weighed by free-float adjusted market capitalisation. Because closely held firms will have a smaller piece of their aggregate market capitalisation floated on public exchanges, the free float adjustment serves to ensure the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed four times a year. The index is biased towards three sectors, namely consumer discretionary, financials and industrials, each of which representing between 19% and 21% of the index. The technology sector accounts for 10-12% of the index´s value. On an individual stock level, Toyota represents 5-6% of the index´s value, followed by Mitsubishi UFJ Financial Group and Softbank, with a 2-3% weighting each.
Fondskonstruktion
The fund uses full replication to track its reference index. The ETF invests in all equities of the index. iShares engages in securities lending within this fund to improve its performance. The gross revenues generated from this activity are split 62.5/37.5 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. The fund lent out 13.61% on average over the 12 months period ending March 2014 and received net lending returns of 0.03%. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification arrangement is subject to changes, and in some cases without notice. Finally, BlackRock limits the amount of assets that can be lent out by this ETF at 50%. For cash and dividend management purposes, the fund uses futures, thus limiting tracking error.
Gebühren
The fund levies a total expense ratio of 0.48%. This lies in the middle of the range of ETFs trackingJapanese equities. Other potential costs associated with holding this fund which are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees.
Alternativen
As of writing, there are many ETFs offering exposure to Japanese equities. A like-for-like alternative would be the db x-trackers MSCI Japan ETF, which uses synthetic replication, but charges a slightly higher TER of 0.50%. In addition, various providers offer currency-hedged versions for Euro-, Pound Sterling-, US Dollar-, and Swiss Franc-investors.
Investors preferring the better known, albeit not as broad, Nikkei 225 Index as benchmark for Japanese stocks can make use of a range of ETFs offered by ComStage, db x-trackers and iShares. The cheapest product is offered by db X-trackers. Physically-replicated db x-trackers Nikkei 225 UCITS ETF (DR) 1D charges a TER of 0.09%.
