In the final part of this round-up of Asian ETFs for European investors, I’ll be looking at four markets I haven’t yet covered: Japan, India, Korea and Australia. If you’re interested in seeing what’s available for other countries, my three previous articles cover China, smaller Asian markets and regional ETFs. 

Unsurprisingly, Japan is the best-served Asian market, with some 20 Europe-listed ETFs. The most popular benchmark for these is the MSCI Japan, a reasonably well-balanced 348-stock index. The largest sector weightings are consumer discretionary (20%), industrials (19%), financials (17%) and IT (14%), while it has what must be one of the lowest energy weightings in the world at just 1%.

iShares and db x-trackers are the major ETF providers covering this index, with around €1.1 billion and €300 million in assets under management, respectively. In line with these providers’ usual approaches, the iShares fund uses the physical (or “in specie”) replication method and pays dividends (semi-annually in this case), while the db x-trackers ETF uses swaps to replicate the index and reinvests dividends; the total expense ratios are 0.59% and 0.5%, respectively. Both funds are listed in most major European markets.

Elsewhere, UBS is unusual in offering two unit classes: ‘A’ units with a TER of 0.56% and an ‘I’ class aimed at institutions with a much higher net asset value per unit and a reduced TER of 0.33%. Both use physical replication and pay semi-annual dividends. Alternatives include swap-based capitalising products from CASAM (0.45% TER), Source (0.5%) and ComStage (0.45%), while ETFlab has an in specie fund that pays quarterly dividends on a TER of 0.5%. All these have limited listings in France, Germany or Switzerland, depending on the provider. Finally, iShares also offers a fund listed in London and the Netherlands that reinvests dividends, but this has attracted little interest so far. Apart from dividends, the details are the same as for its main fund.

If you’re looking to break the Japanese market down by capitalisation, there are two MSCI Japan large-cap ETFs: an in specie fund that reinvests dividends from Credit Suisse’s XMTCH range (0.48% TER) and an ETFlab tracker that distributes dividends (0.5%). ETFlab also offers the only MSCI Japan mid-cap ETF on the same basis, while there are trackers from iShares (0.59%, in specie, semi-annual dividends) and XMTCH (0.42%, in specie, capitalising) for the 800-stock MSCI Japan small-cap benchmark. The sector weightings of all three indices are largely the same as that of the MSCI Japan, although the types of companies included clearly vary substantially.

For investors who want to track the traditional market benchmarks, there are three trackers for the Topix, all of which are swap-based capitalising funds, from Lyxor (0.5% TER), ComStage (0.45%) and Axa-BNP’s EasyETF range (0.45%). Lyxor’s is the largest at around €400 million in AUM and is listed in most European markets. The Topix is substantially larger than the MSCI Japan at almost 1,700 companies, but in practice there’s little difference in composition and the two usually track quite closely.

There are also two Germany-listed ETFs for the 225-stock Nikkei, an annual dividend-paying product from iShares (0.52% TER) and a capitalising fund from ComStage (0.45%). The iShares fund is the larger of the two with around €300 million in AUM. The Nikkei has a lower weighting to financials than other Japanese indices, at around 7%, but offers no other clear reasons why an investor might choose it. In fact, those concerned about best practice in index construction should be aware that the Nikkei is price-weighted like the Dow Jones Industrial Average, rather than following the usual capitalisation-weighted methodology.

Finally, if you’re interested in a fundamental indexing approach, PowerShares has the only such product in Europe with its London-listed Dynamic Japan ETF. This is a 126-stock basket based on the QSG Active Japan index, which seems to include both fundamental criteria (balance sheet strength, earnings growth, earnings quality) and share price momentum. Since the fund has only been running for a year, it’s hard to gauge the merits of the model, although it has beaten the MSCI Japan over that time. The current portfolio seems to have a mid-cap skew and a bias towards value stocks. The fund uses in specie replication, pays quarterly dividends and has a TER of 0.75%.

Secondary market dealing spreads for Japan funds have typically averaged 0.4%-0.6% over the past year, based on Bloomberg data (which only measures the proportion of ETF trading conducted on-exchange). ComStage funds seem to trade with slightly tighter spreads, while the PowerShares, EasyETF and UBS ETFs have been significantly wider at 1% or more.

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