We believe conservative investors can have as much as 10% of their portfolios in foreign stocks. A good way to do that is by choosing exchange-traded funds (ETFs) with an overseas focus.
The best of those funds offer low management fees and well-diversified, tax-efficient portfolios of high-quality stocks.
The ETFs profiled below are from two of the wealthiest markets in Asia as well as one of the region’s emerging markets. The U.S.-China trade dispute affects these markets, as does a strong U.S. dollar, but all three have good long-term prospects. Currently, we see two as buys and the other as a hold.
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ISHARES MSCI JAPAN INDEX FUND (New York symbol EWJ; buy or sell through brokers; us.ishares.com) is an ETF that tries to match the return of the Morgan Stanley Capital International (MSCI) Japan Index.
The fund’s top holdings include Toyota, 4.0%; Mitsubishi UFJ Financial, 2.2%; Sony Corp., 2.1%; Softbank, 2.0%; Sumitomo Mitsui Financial, 1.6%; Keyence Corp. (sensors), 1.6%; Honda Motor, 1.4%; and Mizuho Financial Group, 1.3%. The ETF’s MER is 0.49%.
In the long term, Japan faces a labour shortage as its population ages, and it remains closed to immigration. In the short term, the trade dispute between the U.S. and China—two of Japan’s biggest export markets—is a worry. As well, the country imports almost all of its oil, so high oil prices hurt the economy.
Despite these challenges, the Japanese economy remains sound and corporate earnings keep rising. In addition, the high U.S. dollar is a big plus for exporters.
Recommendation in Canadian Wealth Advisor: iShares MSCI Japan Index Fund is a buy.
VANECK VECTORS VIETNAM ETF (New York symbol VNM; buy or sell through brokers)holds Vietnamese companies and foreign firms that get a significant share of their revenue from the Southeast Asian nation.
The ETF’s top holdings are No Va Land (real estate), 9.0%; Vingroup (conglomerate), 8.4%; Masan Group (conglomerate), 7.5%; Vietnam Dairy, 7.4%; and the Bank For Foreign Trade of Vietnam, 6.6%. The ETF’s MER is 0.66%
The fund cuts some of Vietnam’s above-average political risk by investing part of its assets in firms that are based outside of the country, but do a lot of their business there. It’s a better approach than adding the thinly traded, or illiquid, shares of smaller domestic firms.
Like many emerging markets, Vietnam has dropped lately. That’s because a growing U.S. economy and rising interest rates have pushed up the U.S. dollar. This typically results in capital flowing to the U.S. from emerging markets. That hurts investments in those economies. Even so, Vietnamese exports will likely benefit from trade tensions between China and the U.S. Regardless, the economy also offers diversification and the potential for above-average returns.
Recommendation in Canadian Wealth Advisor:VanEck Vectors Vietnam ETF is a buy for aggressive investors.
ETFs: Government policy, U.S. tariffs should both spur domestic spending in China
POWERSHARES CHINA SMALL CAP PORTFOLIO ETF (New York Exchange symbol HAO; buy or sell through brokers; www.invesco.com) changed its name from Guggenheim China Small Cap ETF in May 2018 when Invesco Ltd. bought Guggenheim’s ETF business.
This particular PowerShares ETF aims to track the AlphaShares China Small Cap Index. It’s made up of the 347 Chinese stocks that foreign investors are allowed to hold and that have market caps of less than $1.5 billion. The ETF has an MER of 0.75% and yields 3.2%.
Top holdings for this $94.3 millon fund are Zall Group (conglomerate), 1.6%; China First Capital, 1.3%; Momo Inc. (social media), 1.1%; Zijin Mining, 1.1%; Yanzhou Coal, 1.1%; Wuxi Biologics, 1.1%; Kingdee International Software, 1.1%; 51job (human resources), 1.0%; Genscript Biotech, 1.0%; and Jiayuan International (real estate), 1.0%.
China continues to work on reducing the high levels of consumer and business borrowing. It also continues to tighten environmental regulations. Both of these efforts will limit economic growth. Still, as the country further matures and wages rise, domestic spending should increase.
U.S. threats of additional tariffs on Chinese goods should also spur the Chinese government to encourage domestic consumption. PowerShares China Small Cap Portfolio ETF is well-positioned to benefit from that trend.
Recommendation in Canadian Wealth Advisor: PowerShares China Small Cap Portfolio ETF is a hold for aggressive investors.
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