Japan has been the shining star of the Asia-Pacific region this year, a fact highlighted by the impressive returns generated by and staggering inflows to ETFs such as the WisdomTree Japan Hedged Equity ETF (DXJ) and the iShares MSCI Japan ETF (EWJ).
Other Asia-Pacific countries have tried investors' patience. Australia ETFs have pulled back due to slack commodities demand. Investors have only recently shown signs of responding to attractive valuations on Chinese stocks and the list of frustration goes on from there.
The good news is select Asia-Pacific ETFs, including those that are not Japan-heavy, could offer investors some upside through year-end.
"S&P Capital IQ's Asia Investment Policy Committee continues to see China, Hong Kong and Korea's stock markets rising significantly by year end," said S&P Capital IQ in a new research note. "The second half of the year should see Shanghai's A-shares' index closing the year more than 16% higher. The Hang Seng China Enterprise Index, or so-called H-shares' index of Chinese companies trading in Hong Kong, are expected by Asia IPC to rise more than 20% by the end of the year."
The Vanguard FTSE Pacific ETF (VPL) is one avenue for playing a rebound in Asia-Pacific equities. As is par for the course with Vanguard ETFs, VPL is cheap with an annual expense ratio of 0.12 percent, making it less expensive than 92 percent of comparable funds.
More importantly, VPL has held up nicely this year with an almost 11 percent gain, a gain that has been made possible in large part by the ETF's almost 57 percent weight to Japan. Australia, Hong Kong and Singapore, all of which have AAA credit ratings, and combine for 32.3 percent of the ETF's weight. S&P Capital IQ rates VPL Overweight.
The PowerShares BLDRS Asia 50 ADR Index Fund (ADRA), an ETF comprised of Asian stocks that trade in the U.S., is another option for investors to mull. ADRA allocates 47.3 percent of its weight, but the fund does offer investors exposure to a possible rebound in Australian and Chinese equities as those countries combine for over 32 percent of the ETF's weight.
Toyota (TM) is by far ADRA's largest holding at 14.6 percent, which is more than 640 basis points larger than the weight given to BHP Billiton (BHP), the ETF's second-largest holding. S&P Capital IQ rates ADRA Overweight.
S&P Capital IQ also sees some promise with South Korea ETFs.
"Korea's Kospi, which has slipped 5.8% this year through August 9, could soar more than 27% by year's end," said the research firm.
Due to the weak Japanese yen and fears over Federal Reserve tapering, factors South Korea itself has identified as the primary risks to Asia's fourth-largest economy, the iShares MSCI Capped South Korea ETF (EWY) has lost more than 13 percent year-to-date.
However, major global banks including Citigroup, Goldman Sachs and JPMorgan have recently made bullish calls on South Korean stocks, citing compelling valuations, and EWY has surged 12 percent off its June lows. S&P Capital IQ rates EWY Overweight.
The First Trust South Korea AlphaDEX Fund (FKO), which is down 11 percent this year, garnered a Marketweight rating from S&P.
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