Churchouse Letter
November 2014         by Peter Churchouse

Peter’s Top 4 Asian ETFs

  • Exchange Traded Funds (ETFs) are one of the most important vehicles available to us as investors. They’ve democratised the investment process for millions of individual investors by allowing us to easily, and cheaply access a huge array of exposures.
  • We can now buy portfolios of stocks and bonds. We can track benchmark indices. We can get exposure to commodities, currencies, interest rates…. you name it. Some provide leverage. Some provide ‘inverse’ exposure which allows us to be against a particular financial asset type (I rarely encourage using these).
  • The choice available can be overwhelming. And there are a huge number of more complicated “synthetic” ETFs on top of the regular ones (which just buy and sell stocks according to the index the ETF tracks).
  • But if you’re looking for Asian ETFs, there’s not as much choice as I’d like, but it’s getting better. Here are my top 4 that I believe make a solid addition to any diversified portfolio.

    #1 - iShares MSCI All Country Asia Ex Japan

    Theme:              Asian Large Cap Stocks

    Ticker:               AAXJ US Equity (USD)

    Exp. Ratio*:      0.67% p.a.

    Yield:                 1.60%

    *The expense ratio is the annual fee that ETFs charge. It expresses the percentage of assets deducted each fiscal year for fund expenses, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

    This is a great way to get some diversified exposure to large and mid-sized companies in emerging as well as developed Asian countries. (In fact we recommended this in our November 2013 letter “Asia On the Brink Again?” We’ve only returned around 5.5 percent so far but we’re happy to have it in our portfolio.)

    I like its broad diversification across Asia without too much concentration on any particular country or sector.

    It’s not a yield trade by any means, paying us around 1.6 percent annually. A lot of that is down to the expense ratio of 0.67% which is slightly high by western standards, although I feel is reasonable here given this ETF holds over 600 stocks across nearly a dozen Asian countries.

    It’s liquid and has a market cap of USD2.75 billion. And with an average price earnings of 12.1, it’s not overly expensive. If you simply want to be long ‘Asia’, then this is a great way to do it.

    AAXJ Country Allocations
    AAXJ Sector Allocations

    #1 - ABF Pan Asia Bond Index Fund

    Theme:              Diversified Asian Govt. Bonds

    Ticker:               2821 HK Equity (USD)

    Exp. Ratio:        0.19% p.a.

    Yield:                 3.41%

    Asian Bond ETFs are hard to come by. There are less than a dozen, and the vast majority of them suffer seriously from a lack of liquidity. There’s an iShares Asian Local Bond ETF listed in Singapore for example that has a market cap of less than US$10mn in total!

    Benchmarked to the Markit iBoxx ABF Pan-Asia Index, this ETF invests in domestic currency-denominated government and quasi-government bonds issued in eight emerging Asia-Pacific markets, namely, China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand.

    It’s listed in Hong Kong, but trades in USD. Currently around half of the holdings have a maturity of five years or less, and it yields around 3.4 per cent with an expense ratio of 0.19%.

    2821 Country Allocations

    #3 - iShares Asia/Pacific Dividend Fund

    Theme:              Asian Dividends

    Ticker:               DVYA US Equity (USD)

    Exp. Ratio:        0.49% p.a.

    Yield:                 5.94%

    This ETF stretches somewhat further south than our other Asian funds, with over half of its weighting in Australian stocks, with another ten percent in New Zealand companies. The rest is in Hong Kong, Singapore and Japan.

    This is also a nice way to broaden exposure to the Australian and Kiwi currencies, as well as their equity markets.

    There aren't a huge number of high dividend paying ETFs in Asia so this is something of a rarity here, paying us nearly over 6 percent in dividends on a quarterly basis.

    DVYA Country Allocations

    #4 - Guggenheim China Real Estate ETF

    Theme:              Chinese Real Estate

    Ticker:               TAO US Equity (USD)

    Exp. Ratio:        0.71% p.a.

    Yield:                 3.05%

    This is a fantastic way for you to get exposure to some of the best value, best run real estate operators in the world.

    This fund is around 85% weighted towards Hong Kong developers, with the remaining allocated towards Mainland Chinese companies listed in Hong Kong.

    You have some of the best property companies in the world here in Cheung Kong Holdings Ltd. (subscribers to The Churchouse Letter are up over 30 percent in a year on our recommendation), Sun Hung Kai, The Link REIT, and China Overseas Land and Investment.

    Right now this ETF is cheap. It trades for less than 0.7 times book value, and less than 8 times earnings.

    The expense ration of 0.71% is a little on the high side, but that shouldn't put you off from this excellent way to get exposure to Hong Kong and China's real estate sector.


    These are not explicit recommendations nor a thorough examination of the ETF options available to us in Asia. These are just a handful of some of the easiest ways for us as investors to access a range of Broad Equity, Bond, Real Estate and Dividend/Income vehicles for our personal portfolios.

    Regular readers will be more familiar with the explicit recommendations found in The Churchouse Letter.

    Good Investing,

    Peter Churchouse



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