About ETFs & Index Funds
Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
The Australian Finance Podcast episode below explains index funds, ETFs and managed funds in more detail:
What Is The iShares MSCI Japan ETF?
The iShares MSCI Japan ETF is an index-tracking ETF that aims to match the performance of the MSCI Japan Index by investing in a portfolio of over 300 of the largest Japanese companies.
These companies include some familiar names such as Sony Corp (TYO: 6758), Nintendo Co. Ltd (TYO: 7974) and Honda Motor Co Ltd (TYO: 7267).
Investments are spread across a variety of industries, with the biggest sector weights in industrials (20.6%), consumer discretionary (18.7%), information technology (11.4%) and financials (10.5%).
This suggests that the IJP ETF provides reasonable diversification benefit to an ASX 200 ETF, which typically overweights financials, materials and health care.
Since the fund’s inception date in 1996, the annual return has been a mere 1.22% per year, which shows why many investors have avoided Japan. However, this Japan ETF has returned 6.76% over the last ten years and 11.21% over the last five years.
Even though the Japanese economy saw no growth for more than a decade, the market has started to pick up in recent years. The lack of growth and apprehension from investors has kept valuations relatively low, with the average price-earnings (PE) ratio only 12.89 times for this ETF.
Fees & Risks
The iShares MSCI Japan ETF has a management fee of 0.47% and several risks to consider. For example, although the Japanese economy has shown promising signs of a recovery, the country still has negative interest rates, low GDP growth (around 1%) and an ageing population.
Japan’s ageing population, in particular, is an issue because it could lead to a reduction in productivity and GDP growth over time. If Japan were to head toward a recession, there would be little that the central bank could do with interest rates already negative.
Japan is a global leader when it comes to technology innovations and many Japanese companies appear to have great growth potential. However, the risks for the overall Japanese economy still seem high. Despite the recent growth, I’m not fully convinced now is the right time to invest in this ETF.
I’d rather invest in our number one ETF pick mentioned in the free report below.
Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.