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Under the Hood: A Stealthy Global ETF


This under-the-radar ETF deserves more attention from investors.


Here's an interesting ETF riddle: Is it possible for a fund issued by the world's largest ETF provider that is nearly five years old with almost $579 million in assets under management that features Apple (AAPL) as its top holding to lead a relatively anonymous existence? In the case of the iShares MSCI Kokusai Index Fund (TOK), the answer is yes.

Admittedly, Apple's allocation in the 1,250-stock fund is just 2.43%, so iShares MSCI Kokusai Index Fund is by no means an Apple ETF, but with 1,250 holdings, the fund is long on diversity.

One of the more recent feathers in iShares MSCI Kokusai Index Fund's cap is that it garnered an Overweight rating from S&P Capital IQ earlier this year as a play on a stronger Japanese yen.

The MSCI Kokusai Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets excluding Japan. The index tracks 23 countries, though 93.3% of iShares MSCI Kokusai Index Fund's country weight is tied up in 10 countries. The US leads the charge with a weight of 58.1% while the UK chimes in at 10.5%.

Excluding Japan isn't a problem given that Japanese stocks continue to struggle despite calls that their valuations are compelling. The iShares MSCI Japan Index Fund (EWJ) is down almost 2% year-to-date. iShares MSCI Kokusai Index Fund's biggest problem at the country level is exposure to a dozen eurozone members. A combined weight of more than 9% to commodities-rich Canada and Australia isn't helping iShares MSCI Kokusai Index Fund's cause in this market environment, either.

At the sector level, an 18.3% allocation to financials might give investors pause at the moment, but iShares MSCI Kokusai Index Fund's beta is only slightly higher than the S&P 500's. Technology, consumer staples, energy, health care, and consumer discretionary names also land double-digit weights with industrials not far behind at 9.93%.

iShares MSCI Kokusai Index Fund's top-10 holdings include eight Dow components with Apple and Nestle, the world's largest food company, as the outliers.

The expense ratio of 0.25% is a point in iShares MSCI Kokusai Index Fund's favor, but volume is light at less than 9,200 shares per day and Finviz data indicate the fund is neither optionable nor shortable. As for yield, iShares MSCI Kokusai Index Fund's 2.5% dividend yield is about 50 basis points better than what the S&P 500 offers and only slightly higher than what an investor would get from the SPDR Dow Jones Industrial Average (DIA).

Regarding valuation, iShares MSCI Kokusai Index Fund's price/earnings ratio checks in at almost 18 and the fund trades at 3.5 times book value. It should be noted that iShares MSCI Kokusai Index Fund's P/E calculation excludes companies with negative earnings and iShares sets the P/E ratio of any company with a P/E over 60 to 60. The book value excludes negative book values and any company over 25 times book value is set to 25.

For now, iShares MSCI Kokusai Index Fund warrants a wait-and-see approach. The ETF's technicals are damaged. iShares MSCI Kokusai Index Fund failed to break through resistance at $43 in March and has since made a lower high around $42. If the 200-day moving average doesn't act as support, iShares MSCI Kokusai Index Fund could see the $35-$36 area. iShares MSCI Kokusai Index Fund hasn't traded below $35 since the third quarter of 2011, so if that area gives out, wait for iShares MSCI Kokusai Index Fund to show legitimate signs of bouncing back rather than trying to catch a falling knife.

Editor's Note: This content was originally published on by The ETF Professor.

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