Rolle im Portfolio
The UBS MSCI Japan ETF provides equity exposure to one of the biggest economies on the globe and could therefore be considered for use as a core component of a well diversified portfolio to gain exposure to the world’s third-largest economy. However, before considering an investment in this ETF--either as core building block or a tactical tool--investors should be aware of existing exposure to Japan through other holdings (for example, Japanese equities comprise nearly 10% of the MSCI World Index) to avoid unintentionally overweighting Japanese shares.
Taking a close look at the track record of the Japanese stock market over the last 20 years, one might wonder whether owning Japanese equities as part of a buy-and-hold strategy would be of any benefit. The MSCI Japan Index rose about 5% of its value over that period, compared to a 280% increase in the MSCI World Index. After the Japanese real estate and stock market meltdown in the 1990s, the Central Bank hesitated to intervene. By the time the Central Bank made a concentrated effort to stimulate the economy, flooding the market with trillions of yen and decreasing interest rates, the economy was already in a deflationary spiral and consumers had lost faith. Low interest rates from there on made the Yen an attractive target for carry traders, helping to strengthen the currency and ultimately hurting exports. However, the stock market rallied since November 2012 while the Yen weakened on the back of a new approach by newly selected Prime Minister Shinzo Abe.
The index is well diversified with little concentration in specific stocks. Its top holding is Toyota representing 7.4% of its value. The index’s top sector allocation is currently financials, representing 22% of the index’s value. Given this high degree of diversification across individual names, the ETF is best used if the investor believes in a broad-based improvement in the Japanese economy as the country moves through a rebuilding period.
Fundamentale Analyse
Japan’s stock market has underperformed those of other developed markets for years. However, this has changed since the election last November of a new government headed by Prime Minister Shinzo Abe. After surging 34.7% year-to-date in local currency terms, the MSCI Japan NR Index has returned a healthy 18.6% as measured in Euro, despite a weakening Yen. By way of comparison, the S&P 500 Index rose 11.3% while the EURO STOXX 50 Index lost 1.4%; both also measured in Euro.
The economy has long suffered under deflationary pressure, but Prime Minister Abe has announced aggressive steps to weaken the yen, raising the inflation target and introducing structural reforms, including a long-term growth plan focusing on healthcare and women in the workforce as untapped resources that could support growth. The Yen has lost over 20% versus the Euro since mid-November when markets already expected Abe to regain power, and has continued to weaken after the G-20 group endorsed the aggressive monetary policy to stimulate Japan’s economy at their meeting in April. The G-20 stance pleased market participants, who had feared criticism of Japan’s plans to double the size of its asset-purchasing program.
The BOJ, under the helm of newly appointed Governor Haruhiko Kiroda, has announced a bond-buying program for up to 70% of newly issued government bonds; equal to ¥50 trillion in each of the next two years. The snap-election, which was called in mid-November, also lifted the Japanese stock market by over 50% since then. The aggressive approach by Japanese policy-makers, has lifted the domestic stock market by over 50%, and is also affecting bond markets around the globe, pushing down government bond yields in the US and Europe.
Going forward, a weakening currency should be expected to support the export-driven economy. Nomura Securities expect that corporate earnings should rise as much as 20% compared to a year earlier if the dollar is around ¥80, and 30% if the Yen weakens to ¥90 per USD. As we write, the Japanese Yen is close to ¥100 per USD. Export growth support from a weaker currency comes at time when Japan has been accepted as the 12th nation to join talks to form the Trans-Pacific Partnership free-trade bloc. The treaty could increase Japanese exports to these countries, offsetting potential weaker demand from China, as the country tightens monetary policy to control inflation.
Over the last few years, industrials, the largest index sector represented in the MSCI Japan index, suffered under the strong yen. However, the aggressive new policy should support export-driven companies. In particular Toyota, the largest index constituent, stands to benefit from a weaker Yen as it manufactures over 40% of its global volume in Japan. This could ultimately have a positive impact on Japanese employment.
Generally, market participants are bullish for 2013. They expect Japanese stocks to remain undervalued and underexposed to international investors, according to the Wall Street Journal. Therefore, a fundamental reweighting by international investors could lead to billions of Euros flooding the Tokyo stock exchange where foreign investors already account for two-thirds of daily trading.
Indexkonstruktion
The MSCI Japan Index includes approximately 320 of the largest stocks of publicly-traded companies based in Japan. Components must meet minimum criteria for liquidity, foreign ownership restrictions, and a waiting period for newly-listed stocks. The securities are weighed by free-float adjusted market capitalisation. Because closely held firms will have a smaller piece of their aggregate market capitalisation floated on public exchanges, the free float adjustment serves to ensure the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed four times a year. As of writing, the index is biased towards industrials (20% of the index’s value), closely followed by financials (20%) and consumer discretionary (20%).
Fondskonstruktion
The UBS MSCI Japan ETF uses physical replication techniques to track the performance of its benchmark, the MSCI Japan index. Given that the index’s components are all very liquid, the fund holds them all in proportion to their weighting in the index, eliminating the potential for tracking error that index sampling might introduce. The fund may lend up to 50% of its assets to generate revenues to also help minimise tracking error. This practice introduces counter-party risk as the party to whom the securities are lent may default, and it is left to investors to decide whether or not the additional income generated through securities lending is adequate compensation for the level of risk entailed. To minimise this risk, UBS restricts securities lending to pre-defined counterparties, holds collateral in a ring-fenced third-party account with State Street Bank, and marks the collateral's value to market daily. UBS and third-party agents such as Clearstream Banking and Euroclear manage the securities lending process, including monitoring collateral values. The ETF distributes dividends twice a year. Movements in the benchmark in excess of returns on cash during the period between when the fund receives dividends and the date it distributes them will result in 'cash drag', which can be a source of tracking error.
Gebühren
The total expense ratio (TER) for this fund is 0.52%. This lies in the upper of the range for ETFs tracking Japanese equities. Other potential costs associated with holding this fund which are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees.
Alternativen
There are two other Japanese large-capitalisation indices popular with ETF providers, the Nikkei 225 and the TOPIX. There is little to choose from between the MSCI Japan and TOPIX indices, but the Nikkei 225 has a far smaller allocation to financial services (about 1%) and utilities (less than 1%) with the difference spread amongst multiple sectors. The iShares Nikkei 225 ETF uses physical replication and levies a TER of 0.50%. The iShares MSCI Japan Monthly EUR Hedged ETF has the greatest trading volume of any ETF tracking that index. The Lyxor Japan TOPIX ETF uses synthetic replication and has the greatest trading volume of any ETF tracking that index and charges a TER of 0.50%.
There are five ETFs tracking the TOPIX, including one from EasyETF, one from ComStage, two from Lyxor (one trading in pounds sterling and one trading in euros) and one Euro hedged version from RBS. While ComStage's ETF charges a low TER of 0.45%, Lyxor's euro-denominated ETF has the greatest daily average on-exchange trading volume, making it a less expensive choice--in terms of the total cost of ownership--for many investors.
