An ETF focused on Japanese stocks has rebounded.
Photo: issei kato/ReutersAs Asian countries emerge from lockdowns ahead of the rest of the world, could ETFs that focus on the region stand to benefit? There may be grounds for optimism, though investors should tread with caution.
A range of ETFs focus on specific Asian countries, subregions or the continent more broadly. Many were pummeled as the coronavirus took hold but have rebounded in recent months. For example, the $9.8 billion iShares MSCI Japan ETF (EWJ) is down almost 6% year to date, but up almost 17% over the past three months. The $5.4 billion iShares MSCI China ETF (MCHI) is up 3.45% in 2020, but has seen a leap of almost 19% in the past three months, while the $3.6 billion Vanguard FTSE Pacific ETF (VPL) is down almost 8% so far this year but up more than 22% in the past three months.
Asia in general has contained the pandemic relatively well, compared with other regions, and many Asian countries are reopening, says Rory Tobin, global head of SPDR ETFs at State Street Global Advisors, which operates a number of Asia-focused ETS, including the $512 million SPDR S&P Emerging Asia Pacific ETF (GMF). The fund is down more than 3% year to date but up almost 24% in the past three months. Mr. Tobin says Hong Kong could hold opportunities, with a low number of reported cases and relatively little impact on the factors driving its growth. However, it is unclear what impact China’s new Security Law could have on the region in the longer term, Mr Tobin adds.
JPMorgan BetaBuilders Developed Asia ex-Japan ETF (BBAX)—a $1.4 billion fund that is down about 12% so far this year but up over 26% in the past three months—focuses on Australia, Hong Kong, New Zealand and Singapore. These countries, like much of Asia-Pacific, feature such long-term drivers of growth as favorable demographics and productivity growth and don’t seem to have been significantly affected by the pandemic, says David Lebovitz, global markets strategist at J.P. Morgan Asset Management. However, Mr. Lebovitz warns that there are numerous risks—a second coronavirus wave, as well as flare-ups in tensions between China and the U.S., and with Europe.
Following a pullback on international exposures in the first half of the year, it is logical that investors might now be looking to put some of that money back to work in Asia equities, says Dave Nadig, chief investment officer and director of research at ETF Database. However, the big question is, “China or no China?” he says.
Rising geopolitical tensions could push investors toward funds that focus on other parts of the continent, Mr. Nadig says.
Still, China may be too big to ignore, Mr. Nadig adds, as it continues to be “the global growth engine.” For most investors, a broad approach—across the region as a whole, or the Chinese economy overall, rather than specific sectors, may be the best strategy, he says.
If there is a rebound in global activity, large-cap exporting companies could benefit. This could fuel a resurgence for the Japanese corporate giants, says Jeremy Schwartz, global head of research at WisdomTree, whose $1.6 billion WisdomTree Japan Hedged Equity ETF (DXJ) is down 11.5% year to date and up about 11% in the past three months. However, Mr. Schwartz warns that this could easily be undone through a second wave of the virus.
The stock market is a forward-looking, discounting machine, which means that any economic improvement in Asian countries emerging from their lockdowns may already be priced in to a large extent, says Ben Johnson, director of passive funds research at Morningstar Inc. Additionally, many of the markets are dominated by global firms, whose sales depend on consumers in the U.S., Europe and beyond: For example, Samsung Electronics accounts for more than 20% of the iShares MSCI South Korea Capped ETF (EWY) portfolio.
“Global sales of the firm’s hand-held devices are going to influence the local market’s performance far more than post-lockdown improvements in local economic fundamentals,” Mr. Johnson argues.
Mr. Cowan is a writer in Northern Ireland. He can be reached at reports@wsj.com.
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