Asia Ex-Japan ETF Investing 101 (AAXJ, AXJL, AXJS)

Eric Dutram: With the markets remaining weak across the globe, investors favor economies that display a compelling domestic growth rate. Asia is one such continent with strong growth dynamics in this jaded economic environment.

Many economies on the continent are currently cushioned by rapidly growing populations, emerging consumer classes and strong budget situations. This is in stark contrast to many developed Western markets which are currently facing the opposite condition for many of their markets (Southeast Asia ETF Investing 101).

Currently, the region is still expected to deliver a 6% growth rate in fiscal 2012, at par with the prior-year level, and impressive considering developed market weakness. Furthermore, some believe that the region is in the mid-cycle of the slowdown and that a recovery could be underway by the end of the fiscal year.

In particular, investment in Asia tends to center around three nations at this time; China, India, and Japan. Below, we have highlighted some of the key points for these top markets which investors need to keep in mind before looking at the space:


Among the major Asian nations, China is considered to be the fastest growing economy. It also holds the distinction of being the biggest exporter in the world. In fact, despite the market crisis, in 2008 and 2009, China has managed to use stimulus effectively to boost growth back up to the 10% rate in 2010, although it has scaled back in recent months.

Notwithstanding, the debt crisis in Europe continues to cast its spell on Chinese exports as Europe is one of the biggest importers of Chinese goods, accounting for approximately 18% of the nation’s overseas shipments. But once the Euro-zone recovers, China will again experience a rebound in exports. The economy is expected to grow at the rate of 8.3% in fiscal 2012.


The Indian economy has grown in leaps and bounds over the past two decades and is considered as one of the dominant economies with an attractive GDP growth rate of approximately 7.5%. In the last decade, foreign ventures and trade, privatization, better industry policy, and capital market reorganization led to a sharp annual economic growth of 9.0%.

Even during fiscal 2008, when all the nations in the world were facing market turmoil, India could deliver growth of 6%. Domestic consumption has also been rising in the country. India is well poised to gain investor confidence attributable to its increasing domestic consumption.

Impressive investment in the country by Foreign Institutional Investors along with falling inflation over a period of six months adds to its positive case. The liquidity has also improved stemming from the reduction in the cash reserve ratio, twice in a row, by the Reserve Bank of India. (Does Your Portfolio Need An India ETF?)


Unlike its rapidly growing counterparts, Japan is stuck in a low growth quagmire. The country is now approaching its third decade of near zero growth with little hope in sight for a turnaround.

This has been further compounded by the recent Fukushima disaster after the March 2011 tsunami. This tragedy devastated large parts of Japan and the full effects from the crisis are still being felt to this day in the country.

To top things off, Japan has already reached its peak in terms of growth since it is a developed economy and its population is actually shrinking. In fact, some estimates suggest that the nation’s population will shrink by over 25% between now and the midpoint of the century.

If that wasn’t enough, Japan is a disaster from a budget perspective as well. Although the country does have a current account surplus, its debt load is impressive, coming in at over 230% of GDP with the national debt is expected to surpass one quadrillion yen at some point in the very near future (Japan ETFs: One Year After The Fukushima Disaster).

Asia ETFs Ex-Japan

Given these realities in the Japanese market, but the promise that is still in a number of the other major Asian nations, some could find it beneficial to skew their portfolios away from Japan.

For these investors, a closer look at the Asia ex-Japan ETF space could be a great idea. While this market isn’t nearly as big as the broad Asia emerging market or Asia developed market space, it is one of the only ways to get exposure to both the industrialized and developing countries in the continent via a single ticker.

Below, we highlight the three ETFs that occupy this space. While they may appear similar at first glance, there are a few differences that investors should be aware of before taking the plunge on Asia Ex-Japan ETFs:

iShares MSCI All Country Asia ex Japan Index Fund (NASDAQ:AAXJ)

Market leader iShares’ entrant in the space is marked by the fund AAXJ, a fund that trades with assets under management of $2,355.3 million while charging an expense ratio of 67 basis points a year. Despite the high expense ratio, the fund has been able to attract a decent level of AUM. (Guide to the 25 Cheapest ETFs)

In terms of the portfolio, the ETF holds over 630 stocks in its basket and puts just 20.1% in the top 10 firms. In the top 10 holdings, 5.0% of AUM has been assigned to Samsung Electronics while Taiwan Semiconductor Manufacturing Co. Ltd. (TSM – Snapshot Report) occupies the second position.

In sector exposure, the fund is heavily invested in financials and information technology with 48.9% of investment. Utilities and health care, on the other hand, account for a modest 4.6% of the assets in this fund.

In terms of country exposure, China and South Korea hold the lion’s share making up 44.7% of the total investment, followed by double digit allocations to Taiwan and Hong Kong as well. (Are Korean ETFs In Trouble?)

WisdomTree Asia Pacific ex-Japan Fund (NYSEARCA:AXJL)

For a dividend-focused approach in the Asia ex-Japan ETF space, a closer look at AXJL is warranted. The fund tracks the WisdomTree Asia Pacific ex-Japan Index which looks to focus on 300 large companies ranked by market capitalization that are incorporated in various parts of the Asia region.

This produces a fund that pays out a solid dividend yield of roughly 4.4% a year, a good level considering the geographic focus of the fund (11 Great Dividend ETFs). Investors should also note that over $89.7 million is under management in the fund and the ETF charges an expense ratio of 48 basis points.

However, the product holds fewer securities than many of its counterparts at just over 246 in total. The concentration level in the top 10 holdings is also at 33.4% which suggest that the fund has just a modest level of diversification.

In terms of sectors, this ETF is also tilted towards financials with 35.9% of the total, while telecom takes the second spot with just under 20% of the fund. Meanwhile, on the light side, utilities and consumer staples together make 6.78% of investment.

The country breakdown comprises Australia taking the top spot with 24.5% of investment while India is last on the radar with just 2.5% of investment.

MSCI All Country Asia ex Japan Small Cap Index Fund (NASDAQ:AXJS)

The newest choice in the small cap Asia-Pacific ETF space is AXJS from iShares. The product debuted in February and hasn’t really had a chance to build up assets yet. However, the cost could be prohibitive as it does charge investors 75 basis points a year in fees.

The fund manages a $10.4 million asset base and invests the amount in a large basket of 830 stocks. The concentration level in the top 10 holdings is currently 4.57% suggesting the fund does a good job of spreading out its assets among the component firms (read Frontier Market ETF Investing 101).

This ETF, also like its counterparts, is weighed towards financials with 20% of investment while the fund is light on telecommunication which makes up just 1.3% of the assets.

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Written By Eric Dutram From Zacks Investment Research

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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