· In this year’s edition of our ETF Focus List, there are a total of 25 changes, consisting of additions and removals of some sub-categories.
· For exposure to Japan, we recommend the Xtrackers Nikkei 225 UCITS ETF (LSE:XDJP), given that its underlying index – Nikkei 225, is our preferred proxy for the Japanese stock market. Moreover, this ETF has a very low expense ratio of 0.09%.
· Our bearish view towards Chinese equities remains. We see long-term structural issues for China’s economy, and no positive catalysts on the horizon that could trigger a re-rating. In view of this, we have moved both China and China A Share from “Core Equity” to “Single Market”.
· Within the “Single Market” category, we have changed the recommended ETFs for India, Singapore, South Korea, and Taiwan.
· In view of our bearish view on China, we have also made a decision to add EM Ex China in “Regional Equity”, for investors who wish to limit their exposure to Chinese equities.
· There are a number of changes within the “Fixed Income” category, as we now offer investors access to LSE-listed fixed-income ETFs which means investors do not have to pay dividend withholding tax on the ETF fund level.
The addition of the London Stock Exchange (LSE) on our platform on 30 October 2023 has further expanded the array of ETFs available to investors. With over 7,700 ETFs listed on our platform, deciding on the right ETF for your portfolio can be daunting, especially so for those new to investing.
In order to assist investors in navigating this array of options across various exchanges, we introduced our ETF Focus List in 2018. Our aim was to provide investors with best ETFs for global equity and fixed-income markets.
The selection process for our ETF Focus List involves a blend of quantitative and qualitative factors. Quantitative factors encompass expense ratio, liquidity, and tracking difference. Qualitative factors include the underlying index, ETF structure, and withholding tax implications.
Our ETF Focus List is updated annually to ensure that our recommendations remain relevant and up to date for investors. We have conducted a refresh of our ETF Focus List for 2024, resulting in 25 changes to showcase a broader spectrum of ETFs available on our platform.
Xtrackers Nikkei 225 UCITS ETF (LSE:XDJP) – Our new recommended ETF for Japan
As a house, we have maintained a bullish stance on Japanese equities since August 2022 due to stronger fundamentals fuelled by robust corporate earnings from strong pricing power and a weak yen. With this stance, extensive research materials on Japanese equities were published prior to the substantial market rally.
Related article: Reasons to buy Japan and the yen after BOJ’s first hike in 17 years
In the previous edition of our ETF Focus List, we recommended the iShares MSCI Japan ETF (NYSE:EWJ), which was the best among the ETFs available on our platform at that time. However, with the launch of LSE on our platform, it has opened doors to more options. Our new recommendation is the Xtrackers Nikkei 225 UCITS ETF (LSE:XDJP) which has a lower expense ratio and smaller tracking difference, making it the most attractive out of the other Japan ETFs (Table 1).
We wish to also point out that the underlying indexes for EWJ and XDJP are different. EWJ tracks the MSCI Japan Index while XDJP tracks the Nikkei 225 Index. MSCI Japan uses a market capitalisation-weighted methodology and includes a broad range of large and mid cap stocks listed in the Japanese equity markets while the Nikkei 225 uses a price-weighted methodology and consists of the 225 largest blue-chip companies on Tokyo Stock Exchange (Table 1).
Table 1: Key differences between iShares MSCI Japan ETF and Xtrackers Nikkei 225 UCITS ETF
|
|
2023 |
2024 |
|
Recommended ETF |
iShares MSCI Japan ETF (NYSE:EWJ) |
|
|
Underlying Index |
MSCI Japan |
Nikkei 225 |
|
Constituents |
This index is created by MSCI Inc. and includes a broad range of large and mid-cap stocks listed in the Japanese equity markets. It covers approximately 85% of the free float-adjusted market capitalisation in Japan. |
This index, also known as the Nikkei Stock Average, is managed by the Nikkei Inc. and consists of the top 225 blue-chip companies listed on the Tokyo Stock Exchange. |
|
Number of constituents |
218 |
225 |
|
Weighting Methodology |
It uses a market capitalisation-weighted methodology, where the weight of each stock in the index is based on its total market capitalisation. |
It uses a price-weighted methodology, where stocks with higher prices have a greater impact on the index's value, regardless of their market capitalisation. |
|
Assets under management (USD millions) |
16,623 |
2,380 |
|
Trading currency |
USD |
GBP |
|
3-year tracking difference |
-1.12% |
-0.31% |
|
Expense Ratio |
0.50% |
0.09% |
|
Source: Bloomberg Finance L.P., iFAST Compilations Data of 10 May 2024 |
||
Moving China and China A Share from “Core Equity” to “Single Market”
Since November 2022, we have been bearish on China. Its shift towards a state-controlled economy, the ongoing property crisis, and the shifting geopolitics serve as structural challenges that would continue to impact long-term growth.
Firstly, we believe China’s shift towards a state-controlled economy will continue to dampen growth. Since November 2020, China has initiated crackdowns across multiple sectors, spanning technology, healthcare, and tutoring. These actions underscore a shift in the economy's priorities towards "national security," "common prosperity," and "stability." Consequently, the long-term profitability of private companies may be jeopardised, as state objectives take precedence over profits. This uncertainty erodes investor confidence in the equity market.
Secondly, the property market is still lacklustre. As of 1Q24, newly constructed commercial residential building sales floor space plummeted by 19.4%, leading to a significant 15.6% YoY increase in unsold housing floor space. Moreover, despite the introduction of a “whitelist” project earlier this year to facilitate lending access for select high-quality projects, real estate investment declined by 9.5% YoY, with a 26.0% deceleration in the pace of funding for developers. This may be due to the banks’ difficulty in assessing developers' repayment capabilities and asset quality due to weak sales demand.
Thirdly, with the increasing geopolitical tensions between the US and China, many multinational companies have shifted their production facilities away from China to diversify operational risks.
With long-term structural challenges in the Chinese economy, we believe China should not necessarily form a core part of investors’ portfolios. Hence, we have moved (i) China and (ii) China A-Share from Core Equity to Single Market Equity.
Related article: Interpreting China’s 5.3% GDP Growth in 1Q24: A Positive Sign?
Related article: The 7 points you should take away from China’s “Two Sessions”
Related article: Riding the Chinese dragon in 2024? It’s no easy feat!
Adding EM ex China in Regional Equity
While we have a bearish view on China, there are potential investment opportunities in other emerging markets. Traditional EM products often entail approximately 30% exposure to China, which may pose risks. Therefore, opting for EM ex China investments enables investors to more effectively manage their exposure to China-related risks.
This is especially so after heightened geopolitical tensions between the US and China have resulted in the shift in investments and supply chains away from China. Key beneficiaries of this trend include other EM countries/regions such as India, Latin America, ASEAN, which offer low production costs and a large labour pool.
One notable instance is India, which has benefited from the "China-Plus-One" strategy which many multinational corporations are increasingly adopting. Additionally, the Indian government is actively supporting the manufacturing sector with measures such as corporate tax reductions and incentives under the "Make In India" campaign.
Meanwhile, Latin America is increasingly becoming a preferred "nearshoring" option for North American and European companies due to its advantageous geographical proximity and low labour costs.
Lastly, ASEAN, a smaller region within emerging markets excluding China, is rising as a vital "China Plus One" destination. Indonesia, for instance, has implemented the omnibus law to attract foreign investment and generate employment opportunities.
For those interested in investing in this space, we recommend the Amundi MSCI Emerging Ex-China ETF (LSE:EMXC).
Related article: Separating China from Emerging Markets: A long-term winning strategy
Changes in Fixed Income category mostly arising from cost-savings
With LSE allowing for greater cost-savings from the lack of dividend withholding tax for fixed-income ETFs on the ETF fund level, it has impacted a few of our previous US-listed recommendations within this category.
More specifically, we are changing our recommended ETF for Global EM in Fixed Income from our previous year’s choice, the iShares J.P Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB), to its LSE-equivalent, the iShares J.P Morgan USD Emerging Markets Bond UCITS ETF (DIST) (LSE:IEMB). To be clear, this change is largely due to the withholding tax implications, as the NASDAQ-listed ETF is less cost-effective.
Similarly, for the reasons mentioned above, we will also be changing our recommended ETF for US and US High Yield to LSE-listed alternatives such as SPDR Bloomberg US Aggregate Bond UCITS ETF (LSE:USAG) and iShares Broad USD High Yield Corporate Bond UCITS ETF USD (Dist) (LSE:HYUS) respectively.
Besides changing these recommendations above for greater cost-savings, we have also replaced one of the sub-categories - Global ex US, with Global to provide investors with a broader, more diversified approach. Last but not least, we have removed China Govt-Centric bonds due to our bearish view on China, and its unattractive yield in the current high-interest rate environment.
Table 2: Summary of changes in Fixed Income category
|
Region |
2023 |
2024 |
|
Global EM |
iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ.EMB) |
iShares J.P. Morgan USD Emerging Markets Bond UCITS ETF (Dist)(LSE:IEMB) |
|
Global ex US |
Vanguard Total International Bond Index Fund ETF Shares (NASDAQ:BNDX) |
- |
|
Global |
- |
iShares Core Global Aggregate Bond UCITS ETF USD (Dist) (LSE:AGGG) |
|
US |
iShares Core U.S. Aggregate Bond ETF (NYSE:AGG) |
|
|
US High Yield |
Xtrackers USD High Yield Corporate Bond ETF (NYSE:HYLB) |
iShares Broad USD High Yield Corporate Bond UCITS ETF USD (Dist) (LSE:HYUS) |
|
China Govt-Centric |
ICBC CSOP FTSE Chinese Government Bond Index ETF USD (SGX:CYC) |
- |
Changes in the Single Markets category
In the Single Markets category, firstly, we are changing our recommendation for Singapore from SPDR Straits Times Index ETF (SGX:ES3) to Nikko AM Singapore STI ETF (SGX:G3B). This came about as Nikko AM reduced their expense ratio for G3B at the start of the year from 0.30% to 0.25%. With this reduction, it now has a lower expense ratio relative to its peer, ES3 which has an expense ratio of 0.26%. Besides this, we also note that G3B has a lower three-year tracking difference.
Secondly, we are also changing our recommended ETF for South Korea from iShares MSCI South Korea ETF (NYSE:EWY) to Franklin FTSE South Korea ETF (NYSE:FLKR). This change is driven by FLKR’s significantly lower expense ratio of 0.09% versus EWY’s 0.59%.
For the same reason, we are also changing our recommended ETF for Taiwan from iShares MSCI Taiwan ETF (NYSE:EWT) to Franklin FTSE Taiwan ETF (NYSE:FLTW). EWT has a higher expense ratio of 0.59% compared to FLTW’s expense ratio of 0.19%.
Lastly, as for India, we are changing our recommended ETF from last year’s recommendation iShares MSCI India ETF (BATS: INDA) to its LSE-equivalent iShares MSCI India UCITS ETF (LSE:NDIA) for its significantly lower tracking difference and better performance over the longer-term.
Table 3: Summary of changes in Single Markets category
|
Region |
2023 |
2024 |
|
India |
iShares MSCI India ETF (BATS.INDA) |
|
|
Singapore |
SPDR® Straits Times Index ETF (SGX.ES3) |
|
|
South Korea |
iShares MSCI South Korea ETF (NYSE:EWY) |
|
|
Taiwan |
iShares MSCI Taiwan ETF (NYSE:EWT) |
Other key changes to the list
Removals:
We have removed the Frontier Market category from Regional Equity due to a lack of investors’ interest in certain frontier markets such as Kazakhstan, Romania, Morocco and Columbia.
Moreover, we have removed China-related tactical plays due to our bearish view on China.
Changes:
We are shifting US Semiconductors from "Tactical Plays" to "Core Equity" and reclassify it as "Digital Economy" due to the vital role chips play in the Digital Economy. Given the importance of the tech sector today, we would like to reiterate that semiconductors should form a core allocation among investor's portfolio.
Related article: Chip stocks have soared to record highs. Why share prices still have room to climb.
We also continue to update our ETF Focus List under the “Tactical Plays” category.
We have renamed the “Digital Payments” to “Fintech” as Fintech encompasses a broader exposure of businesses related to the technological advancements in the finance industry. This includes unique mobile and digital solutions for insurance, investment, fundraising and third-party lending. In this category, we recommend the Global X Fintech ETF (NASDAQ:FINX) for its smaller tracking difference and lower expense ratio of 0.68% versus last year’s recommendation ETFMG Prime Mobile Payments ETF (NYSE:IPAY) of 0.75%.
Additionally, we changed our recommended ETFs for both Global Financials and Global Healthcare. Our recommended ETF for Global Financials is now the Xtrackers MSCI World Financials UCITS ETF (LSE:XDWF) which has a much lower expense ratio of 0.25% versus 0.42% for our previous recommendation. Similarly, we switched our recommended ETF for Global Healthcare from iShares Global Healthcare ETF (NYSE:IXJ) to Xtrackers MSCI World Health Care UCITS ETF (LSE:XDWH).
Table 4: Summary of changes for Tactical Plays
|
Sector |
2023 |
2024 |
|
China Clean Energy |
Global X China Clean Energy ETF (HKEX:2809) |
- |
|
China Electric Vehicles |
Global X China Electric Vehicle and Battery ETF (HKEX.2845) |
- |
|
China Healthcare |
KraneShares MSCI All China Health Care Index ETF (NYSE.KURE) |
- |
|
China Semicon |
GUOTAI SEMICONDUCTOR INDUSTRY ETF (SSE:512760) |
- |
|
China Tech |
GF ChiNext Board ETF Index (SSE:159952) |
- |
|
Fintech |
ETFMG Prime Mobile Payments ETF (NYSE:IPAY) |
|
|
Global Financials |
iShares Global Financials ETF (NYSE:IXG) |
|
|
Global Healthcare |
iShares Global Healthcare ETF (NYSE:IXJ) |
As for the “Commodity” category, we have updated our recommendation for Metals from VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) to iShares MSCI Global Metals & Mining Producers ETF (NYSE:PICK). This reflects our aim for a much broader exposure, as a metals and mining play is more representative of the overall sector.
A starting point for your investment journey
The objective of our ETF Focus List is to serve as a good starting point for investors by zeroing in on the best-in-class ETFs from the vast number of options available on our platform.
While ETFs are not the only investment products that investors can select for their portfolios, they still serve as great investment tools for gaining diversified exposure to markets at a low cost.
As for the ETFs which have been removed or replaced, investors who are holding on to them should not be worried as they remain viable investment options. They will also continue to be available under the Regular Savings Plan (RSP), along with the new additions.
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