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Under the Hood: Take the Asia, Leave the Japan


Evaluating Japanese ETFs.


Thing is, just because a market looks cheap does not mean it will deliver noteworthy returns. That has been the case with Japan and its nemesis, China. Over the past five years, three years, year, and year-to-date, the iShares MSCI Japan Index Fund (NYSEARCA:EWJ) has offered negative annualized returns.

Japan's struggles have not diminished the allure of investing in the Asia-Pacific region. Those looking to play the Asia-sans-Japan theme might want to have a look at the unheralded WisdomTree Asia Pacific ex-Japan Fund (NYSEARCA:AXJL).

The WisdomTree Asia Pacific ex-Japan Fund has been around since June 2006. In that time, the ETF has amassed almost $91 million in assets. AXJL embodies two of the ETF themes WisdomTree has been a pioneer of: Dividends and the exclusion of a sector or country.

It is the yield that helps distinguish AXJL. The fund currently has a 30-day SEC yield of 3.47% and a distribution yield of 5.43%. Comparable funds cannot even come close that. The SPDR S&P Emerging Asia Pacific ETF (NYSEARCA:GMF) yields just 2.33%. The PowerShares FTSE RAFI Asia Pacific ex-Japan Portfolio (NYSEARCA:PAF) has a 30-day SEC yield of just 2.64%.

AXJL illustrates two points some investors are already intimately familiar with: Dodging Japan while embracing dividends has proven efficacious in recent years. The fund boasts an average annualized return of almost 8.6% since inception and is in the green over the past year, year-to-date, and over the past three years and five years. Despite the exclusion of Japan, AXJL is not overly risky at the country level. In fact, the ETF is heavily allocated to developed markets as Australia, Hong Kong, and Singapore account for half of the fund's weight. Additionally, Taiwan and South Korea combine for over 20% of the fund's weight and a case can be made that neither should be considered an emerging market any longer.

Exotic fare does not account for much of AXJL's lineup. Combine Malaysia, Thailand, Indonesia, India, and the Philippines and the result is less than 19% of the fund's weight. Indian exposure in AXJL does not come by way of individual stocks, but through the iPATH MSCI India Index ETN (NYSEARCA:INP).

Financials and telecommunications dominate at the sector level, combing for almost 47% of the fund's weight. Regarding valuation, AXJL's index trades at about 13 times earnings and 1.7 times book value, two numbers that compare favorably with the older, larger iShares MSCI Pacific ex-Japan Index Fund (NYSE:EPP).

Given the recent market doldrums and the notion that US stocks are the best bet when it comes to developed market equities, AXJL requires some patience. The fund appears technically vulnerable and a drop below $63.75 could portend another $2 or more of downside.

That said, the ETF's combination of strong yield, ex-Japan developed markets exposure and a decent expense ratio make the fund a good idea for long-term, income investors. They can just wait for better pricing.

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

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