How to Invest in Asia with ETFs

We're not big fans of the fund management industry at MoneyWeek. Too many products charge huge fees, often for doing nothing more complicated than tracking a market index as closely as possible.

If it's a market tracker you want, you might as well pay as little as possible for it. That's why we like exchange-traded funds (ETFs), which have much lower costs than 'actively' managed funds.

So here I've compiled a list of Asia-focused ETFs.

I've also considered what you should look for when choosing one, and highlighted a few that together I believe would make a good Asia portfolio.

What's on offer

Since there are now so many Asia ETFs available, I'll break them out by listing to make the tables more manageable.

First, here are the 19 London-listed ones.

Country	Provider	Name	Exchange	Ticker	Gross fee
China	Deutsche Bank	FTSE/Xinhua China 25	LN	XX25	0.60%
China	iShares	FTSE/Xinhua China 25	LN	FXC	0.74%
China	Lyxor	China Enterprise (HSCEI)	LN	LCHN	0.65%
India	Deutsche Bank	S&P CNX Nifty	LN	XNIF	0.85%
India	Lyxor	India S&P CNX NIFTY GBP	LN	LNFT	0.85%
Japan	Deutsche Bank	MSCI Japan	LN	XMJP	0.50%
Japan	iShares	MSCI Japan Smallcap	LN	ISJP	0.59%
Japan	iShares	MSCI Japan	LN	IJPN	0.59%
Japan	Lyxor	Japan TOPIX GBP	LN	LTPX	0.50%
Korea	Deutsche Bank	MSCI Korea	LN	XKS2	0.65%
Korea	iShares	MSCI Korea	LN	IKOR	0.74%
Real Estate	iShares	FTSE EPRA/NAREIT Asia Property Yield	LN	IASP	0.59%
Region	Deutsche Bank	MSCI AC Asia ex Japan	LN	XAXJ	0.65%
Region	Deutsche Bank	MSCI EM Asia	LN	XMAS	0.65%
Region	iShares	MSCI AC Far East ex-Japan Smallcap	LN	ISFE	0.74%
Region	iShares	MSCI AC Far East ex-Japan	LN	IFFF	0.74%
Taiwan	Deutsche Bank	MSCI Taiwan	LN	XMTW	0.65%
Taiwan	iShares	MSCI Taiwan	LN	ITWN	0.74%
Vietnam	Deutsche Bank	FTSE Vietnam	LN	XFVJ	0.85%

For non-UK investors, most of these are available on other exchanges too. Many can also be bought in both sterling (GBP) and US dollars (USD) in London – I've given the GBP ticker in all cases.

The US is by a long way the biggest overall ETF market, with a significantly larger selection than the UK. The range includes several specialised ETFs that track non-standard indices and I'll look at a few of these later on.

Country	Provider	Name	Exchange	Ticker	Gross fee
China	Claymore	AlphaShares China Real Estate	US	TAO	0.95%
China	Claymore	AlphaShares China Small Cap	US	HAO	1.00%
China	iShares	FTSE China (HK Listed)	US	FCHI	0.74%
China	PowerShares	Golden Dragon Halter USX China	US	PGJ	0.73%
China	ProShares	Ultra FTSE/Xinhua China 25	US	XPP	0.95%
China	State Street	SPDR S&P China ETF	US	GXC	0.59%
China (short)	Proshares	UltraShort FTSE/Xinhua China 25	US	FXP	0.95%
Currency	WisdomTree	Dreyfus Chinese Yuan Fund	US	CYB	0.45%
Currency	WisdomTree	Dreyfus Indian Rupee Fund	US	ICN	0.45%
Currency	WisdomTree	Dreyfus Japanese Yen Fund	US	JYF	0.35%
Hong Kong	iShares	MSCI Hong Kong	US	EWH	0.52%
India	PowerShares	India [Indus India]	US	PIN	0.78%
India	WisdomTree	India Earnings Fund	US	EPI	0.88%
Indonesia	Van Eck	Market Vectors Indonesia Index	US	IDX	1.08%
Japan	PowerShares	FTSE RAFI Japan	US	PJO	0.75%
Japan	ProShares	Ultra MSCI Japan	US	EZJ	0.95%
Japan	State Street	SPDR Russell/Nomura Small Cap Japan	US	JSC	0.55%
Japan	State Street	SPDR Russell/Nomura PRIME Japan	US	JPP	0.50%
Japan	WisdomTree	Japan Total Dividend Fund	US	DXJ	0.48%
Japan	WisdomTree	Japan SmallCap Dividend Fund	US	DFJ	0.58%
Japan (short)	ProShares	UltraShort MSCI Japan	US	EWV	0.95%
Malaysia	iShares	MSCI Malaysia	US	EWM	0.52%
Real estate	iShares	FTSE EPRA/NAREIT Developed Asia	US	IFAS	0.48%
Region	iShares	MSCI AC Asia ex Japan	US	AAXJ	0.74%
Region	State Street	SPDR S&P Emerging Asia Pacific	US	GMF	0.59%
Singapore	iShares	MSCI Singapore	US	EWS	0.52%
Thailand	iShares	MSCI Thailand Investable Market	US	THD	0.63%

Elsewhere, Japan has a growing choice of sector funds which allow you to focus on industries such as banks and real estate. The Tokyo Stock Exchange keeps a list of what's available on its website.

Aside from this, there are plenty of ETFs in the European markets and several in Singapore and Hong Kong. The list below isn't exhaustive; I've generally only included those that track something not available through a UK or US listing.

Country	Provider	Name	Exchange	Ticker	Gross fee
China	iShares	Dow Jones China Offshore 50	DE	DJCHOEX	0.62%
China	Axa- BNP	EasyETF FTSE Xinhua China 25	FP	EXCEUR	0.60%
China	BOCI - Prudential	WISE - CSI HK 100 Tracker	HK	2825	0.99%
China	BOCI - Prudential	WISE - CSI300 China Tracker	HK	2827	1.39%
China	BOCI - Prudential	WISE - SSE50 China Tracker	HK	3024	1.39%
Hong Kong	Lyxor	Hong Kong (HSI)	FP	HSI	0.65%
Hong Kong	State Street	Tracker Fund of Hong Kong	HK	2800	0.05%
India	Lyxor	MSCI India	FP	INR	0.85%
India	iShares	MSCI India	SP	INDIA	1.05%
Japan	Axa- BNP	EasyETF Topix	FP	EJP	0.50%
Korea	Axa- BNP	EasyETF DJ South Korea Titans 30	FP	EEKEUR	0.55%
Malaysia	Lyxor	MSCI Malaysia	FP	MAL	0.65%
Real estate	iShares	DJ STOXX Asia Pacific 600 Real Estate	DE	SREPEX	0.72%
Region	Axa- BNP	Easy ETF DJ Stoxx Asia/Pacific ex-Japan	FP	ETAEUR	0.55%
Region	State Street	ABF Pan Asia Bond Index Fund	HK	2821	0.21%
Singapore	DBS	Singapore STI	SP	DBSSTI	0.20%
Singapore	State Street	streetTRACKS Straits Times Index	SP	STTF	0.30%
South Korea	Lyxor	MSCI Korea	FP	KRW	0.65%
Taiwan	Axa- BNP	EasyETF TSEC Taiwan 50	FP	EEWEUR	0.60%

How to choose an ETF

So now that we have an idea what's available, what do you have to consider when picking an ETF?

1) Understand what they're tracking. Some of these indices are very different to others, just as the Dow Jones Industrial Average is a different beast to the S&P 500. This is particularly an issue with China, since almost every fund tracks a different index (I'll take a look at which are best later on).

Also, be aware of problems with market tracking: certain sectors can form a disproportionately large chunk of the index. For example, property and financials combined make up around 60% of the MSCI Hong Kong. I'm not too concerned about this – both of those sectors will benefit greatly from a richer Asia – but it's a lesson to investors, that while ETFs are great for diversifying across countries, they're not always so hot at diversifying across industries. In general, more modern indices from providers such as MSCI are more diverse than the traditional benchmarks like the Hang Seng and the Straits Times Index, but they're not perfect.

2) Decide whether you want an ETF that pays regular dividends or one that capitalises them (rolls up the dividends and adds them to the fund price). Dividend payments are more common, especially among the larger providers, but some – in particular Deutsche Bank – capitalise all dividends.

3) Remember that ETFs are not a perfect mirror of the market. Look at tracking error - how closely the ETF tracks its benchmark index. Many ETFs reduce costs by buying a representative basket of stocks in the index rather than all of them; this means that the performance of the fund and the index can diverge quite markedly, especially in the short term.

Also take into account the liquidity of the ETF. While the biggest funds – such as iShares – are very actively traded and have only small spreads between bid and offer prices, not all are. Both tracking error and liquidity will be more important if you plan to trade in and out of ETFs very actively, than if you intend to hold a position for the long term.

4) Know how it works. As you may know, there are two types of ETFs – 'in specie' and 'swap-based'. The first holds the underlying securities that make up the index. The second has a swap contract with a counterparty that means it will get paid (or have to pay) any gain (or loss) in the index, rather than owning the securities. Obviously, if the counterparty were to fail, the ETF wouldn't get paid on its swap.

This caused chaos last autumn when AIG – a big counterparty – was on the edge of collapse. For more on this, you can read a piece that David Stevenson wrote at the time: Are your ETF investments safe?. I'm not too worried about this – I think the chances of any major counterparty being allowed to fail are now minimal. But if you're concerned, check which type an ETF is before investing.

5) Be careful when using leveraged ETFs (the ProShares Ultra and Ultrashort ones). Make sure you understand exactly what these do. For example, the Ultrashort China aims to provide "daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the FTSE/Xinhua China 25 Index".

The wording is crucial here. Returns are based on daily percentage moves, not long-term performance. So over the long term, some counter-intuitive things can happen.

ProShares has a detailed explanation on its website here as to why this happens. As a result, leveraged ETFs are only really suitable for short-term trades. Over the long term, they may produce returns that are far away from what you expect – especially when markets are very volatile.

6) Remember that you are exposed to currency risks that may be less obvious than you think. For example, the iShares UK MSCI-based funds are priced in GBP, but track a USD-priced total return index of Japanese stocks. As a result, the performance of the iShares Japan ETF, the MSCI Japan in USD terms (which is what the ETF tracks) and the MSCI Japan in yen terms can be very different.

In this case, trends favoured the UK based investor, to the point where they'd actually be up on a year ago – but this won't always be the case. In the long run, I expect both the dollar and sterling to weaken against most Asian currencies, so UK investors should benefit. But it's easy too for currency gyrations to lose you money on short-term trades.

Building an Asia portfolio out of ETFs

With all this in mind, how should you go about building an Asia portfolio with ETFs? Obviously this will depend on which markets and themes you favour above others. But if I were building an ETF portfolio from scratch, it would probably look something like this.

1) China is the hardest when it comes to choosing an index. The only two ETFs that directly follow the mainland market are the BOCI CSI300 and SSE50 (although Van Eck has also talked of launching one). Both have high fees and with the mainland market looking expensive and bubbly, neither appeal to me.

Most of the rest invest wholly or mostly in Hong Kong-listed Chinese stocks, but even here there's a lot of variation in what they cover. The Halter USX China covers only China-centred firms listed in the US. The two Claymore funds invest in a mix of US and Hong Kong-listed stocks, while the S&P China BMI also includes some Singapore-listed stocks.

In my view, the least attractive are the FTSE/Xinhua 25 trackers, which follow a pretty narrow index of 25 large stocks. On balance, I would go for the SPDR S&P China (GXC) as it's cheap and covers a broad range of stocks, including many smaller ones.

2) I'd choose to invest a fair amount of the overall China allocation indirectly, using the MSCI Hong Kong (EWH) and Taiwan ETFs (LN:XMTW or LN:ITWN). Hong Kong will benefit from a wealthier China (especially the property stocks, which are a big component of the local market) and closer ties with the mainland are also likely to boost Taiwan, as I outlined here: Taiwan: the next big China play.

As mentioned above, I'd favour the MSCI Hong Kong trackers over Hang Seng ones. The same applies to Singapore – I'd pick the MSCI Singapore fund (EWS) over the Straits Times Index ones. The Singapore market is fairly cheap and as a key regional hub will benefit from the rise of all its neighbours.

3) I think Indonesia is one of Asia's most promising stories (see this recent piece: Indonesia: one emerging market you can't afford to ignore) and I'd want a substantial weighting there. Investors have no option except the Van Eck fund (IDX), although with the country getting a lot more attention these days, I think we'll have more choice in the future.

4) India is also a key holding, but the domestic Indian market is not cheap in my view. We don't have as many alternative ways to play it as we have with China, but we could use the Wisdom Tree India Earnings Fund (EPI). This tracks a proprietary index that's wider than the Nifty and MSCI India (around 150 stocks compared to 50-60). More significantly, it's one of a new type of indices called fundamental indices, which weight stocks according to fundamentals – in this case by earnings – instead of market cap.

In theory, this will mean that you hold less of the more overvalued stocks in the market (the price/book of the Wisdom Tree fund is around 2.5, compared with around 3.3 for the Nifty). Whether this approach will deliver better returns over the long-run remains to be seen – back-testing of that strategy suggests yes, but this approach is fraught with errors. However, it's a new approach that seems worth trying.

5) I also think Japan's multi-year shake-out is reaching its conclusion and that the market has finally bottomed, as I discussed here: Don't abandon Japan. You could buy a broad-market tracker, but I think smaller firms (LN:ISJP), banks (JP:1615) and real estate investment trusts (JP:1343) will be among the bigger beneficiaries and it's worth tracking them directly (the Nomura ETFs for the latter two are only listed in Tokyo).

6) Elsewhere, Vietnam is another one of my favourite long-term prospects; we only have the DB tracker at present (LN:XFVT). The iShares Malaysia (EWM) is a way to bet on the economy being restructured successfully, as I also outlined in the Taiwan piece mentioned above.

Personally, I would have no weighting in Korea or Thailand for reasons I mentioned here: One Asian stock market you should avoid, and here: Thailand looks cheap – so is it time to buy? And as yet, there's no ETF for the Philippines; some investors use Philippine Long Distance Telephone, which accounts for about 25% of the local benchmark, as a proxy for the overall market, although this is obviously very imperfect. If you decide to go down this route, it has an ADR listed in New York (PHI).

Finally, I should stress this is not a 'one size fits all' solution, but a summary of what my top picks and preferred ideas are. If you decide to go down the ETF route, you should adjust this selection in line with your own willingness to take risks and hold it as part of a balanced portfolio of global equities and other assets.

In other news this week...

Market	Close	5-day change
China (CSI 300)	3,668	+4.2%
Hong Kong (Hang Seng)	19,983	+6.3%
India (Sensex)	15,379	+4.3%
Indonesia (JCI)	2,186	+3.2%
Japan (Topix)	920	+5.6%
Malaysia (KLCI)	1,156	+3.1%
Philippines (PSEi)	2,676	+4.8%
Singapore (Straits Times)	2,533	+4.2%
South Korea (KOSPI)	1,503	+4.3%
Taiwan (Taiex)	6,973	+1.8%
Thailand (SET)	614	+3.0%
Vietnam (VN Index)	455	+6.0%
MSCI Asia	98	+5.1%
MSCI Asia ex-Japan	421	+4.9%

With the summer lull well underway, there was little substantial news in the markets. However, new Chinese initial public offerings are beginning following the lift on a 10-month freeze on new floats in the mainland market. China State Construction Engineering, the largest housing contractor, filed for a RMB50bn (US$7.3bn) IPO that would value it at 50 times 2008 profits, banking on investor enthusiasm for the rebounding property sector.

Similarly, a HK$5.95bn (US$768m) initial public offering for Chinese building materials group BBMG has been one of the most popular Hong Kong new listings ever. Institutional investors were reported to be 95 times oversubscribed and retail investors 330 times as investors bet that the firm will be a major gainer from the government construction stimulus plans and the property market rebound. The stock priced at HK$6.38, around 14 times earnings forecasts for this year.

Comments

[Alan Young:]

A fine piece of work! It takes true dedication to cover such a wide subject, and try to compare all the products available on three disparate markets. I appreciate your analysis.

You did miss a few:
Indonesia does have another alternative for US investors: the closed-end Indonesia Fund (IF).
Also in the US, Korea and Taiwan are accessed via iShares EWY and EWT, respectively.

Jul 28 10:46 PM

[fix:]

I'm going to toss in 2833 as a tracker of the HSI listed in Hong Kong. If I remember correctly it has a lower expense then 2800 but has a higher minimum transaction amount.

Jul 29 12:35 AM

[JGL:]

Thanks! A great summary.
However don't you think that many of these markets (China; India) have risen a lot in a relatively short time and one should either DCA in slowly or wait for a (eventual and hoped for...) pullback?

Jul 29 08:10 AM

[Alan Young:]

"Personally, I would have no weighting in Korea or Thailand for reasons I mentioned here: [links]"

Those articles were fine when they were written, but a lot has happened in the last 6 months-- don't you think it's time to re-evaluate these markets?

Jul 29 02:44 PM